JGB futures hit 3-mth high after U.S. job losses

* Bond purchasing continues after slow buying in Apr-June

* JGB market underpinned by Thursday's smooth auction

* 10-yr yield hits 3-mth low, 20-yr yield below key 2 pct

By Kaori Kaneko

TOKYO, July 3 (Reuters) - Japanese government bonds climbed and futures hit a three-month high on Friday as stocks dropped after bleak U.S. jobs data dampened expectations about the pace of economic recovery, helping demand for government debt.

Investors continued to pick up cash bonds across the board to make up for a slow start to their buying in the first quarter of the financial year from April to June, with investors such as life insurers adding longer-dated bonds to their portfolios.

The benchmark 10-year yield slipped to a three-month low, also underpinned by a smooth auction for the maturity on Thursday despite earlier worries about an increase in the size of the sale.

The 20-year yield briefly dipped below 2 percent for the first time in two months. Analysts said the appetite of investors such as life insurers for 20-year bonds tends to fall away when the yield drops below 2 percent.

September futures rose 0.24 point to 138.44 after touching 138.55, their highest since late March.

"After stocks declined in the wake of the U.S. jobs figures, worries over the economic outlook prevailed," said Naomi Hasegawa, a senior fixed income strategist, at Mitsubishi UFJ Securities.

Wall Street fell more than 2 percent on Thursday after the jobs data but the Nikkei dropped just 0.6 percent on Friday.

Dealers said Japanese banks with ample funds thanks to the Bank of Japan's easy monetary policy continued to invest in shorter-maturities.

"Investors continued buying bonds after the 10-year auction went smoothly and they alleviated worries on supply increase to some degree," said Akitsugu Bandou, a senior economist at Okasan Securities.

The yield on benchmark 10-year bonds fell 3.5 basis points to 1.320 percent, the lowest in three months, flattening the yield curve slightly.

Investors worried about the impact of rising government debt issuance had hung back from buying earlier in the year. But they stepped up their purchases after the 10-year yield rose to an eight-month high of 1.560 percent in early June on a spike in U.S. Treasury yields and gains in global stock prices.

The two-year yield slipped 2 basis points to 0.255 percent after falling as far as 0.250 percent, its lowest since January 2006.

The five-year yield ended down 1.5 basis points at 0.675 percent, after dipping to 0.660 percent, a level last seen in late January. A drop below that level would take it to its lowest in nearly four years.

The 30-year yield fell 2 basis points to 2.165 percent.

The market is waiting for fresh incentives, with U.S. financial markets closed on Friday, and participants are looking ahead to events such as a 40-year JGB auction next week and a series of U.S. Treasury sales.

The Treasury Department announced on Thursday it would sell $73 billion in longer-dated debt next week. It will sell $35 billion of three-year notes, $19 billion of reopened 10-year notes and $11 billion of indexed 30-year notes, along with $8 billion of 10-year inflation indexed notes. (Reporting by Kaori Kaneko; Editing by Joseph Radford)