NEW YORK (Reuters) - Treasury prices plunged on Wednesday for a second straight day, pushing benchmark yields to a six-month high, after a deal in Washington to extend tax cuts fueled fears of inflation and a swelling budget deficit.

The sharp dip in prices brought some buyers to the table in an auction of $21 billion of reopened 10-year notes, which was part of $66 billion of coupon-bearing securities sales this week. Bond prices rebounded somewhat from their lowest levels of the day following the sale, which analysts said saw about average demand.

Still, sentiment remained strongly bearish heading into the sale of $13 billion of reopened 30-year bonds on Thursday.

“One auction does not reverse a process, and it would take tens rallying a lot more to give us a convincing technical reversal,” said David Ader, head of government bond strategy at CRT Capital Group in Stamford, Connecticut.

A proposal to extend Bush-era tax cuts is expected to boost U.S. economic growth by as much as 1 percentage point next year. But the long-term cost to the government from falling tax receipts has spooked bond investors and resulted in a disappointing three-year debt auction on Tuesday.

Some investors fear such a tax move could result in more bond purchases by the Federal Reserve, which would boost the government’s deficit and stoke price inflation.

“This tax agreement is a disaster for the U.S. fiscal situation,” said Howard Simons, strategist at Bianco Research in Chicago.

Though the sell-off in Treasuries has certainly been vicious, so far it appears to be a bond market correction from historically low yields rather than the beginning of a sovereign debt crisis like the one that has raged in the euro zone this year.

For example, the cost of insuring U.S. government debt in the credit default swap market was little changed at around 40 basis points, or $40,000 per year for five years to insure $10 million in Treasuries.

Benchmark Treasuries were on track, however, for the biggest two-day sell-off since September 2008. That jump in yields came in an unwinding of safe-haven bets as the government said it would use $50 billion to back money-market mutual funds and as the U.S. temporarily banned short trading in stocks.

That week in September 2008 witnessed the bankruptcy of Lehman Brothers, a government bailout of giant insurer AIG and the sale of Merrill Lynch to Bank of America.

The Federal Reserve had interest rates at the time set at 2 percent, as opposed to the current range of zero to 0.25 percent.

The market decline on Tuesday resulted in a paper loss of $61 billion, according to Bank of America Merrill Lynch fixed income indexes.

Adding to the bearish sentiment was unwinding of hedges by mortgage investors and weak demand at a 4 billion euro auction of two-year German government debt.

The bond market is stuck in negative territory, as it attempts to find stability after breaching a series of key technical supports in recent days.

“I think that the market is going through the process of re-pricing that in. It was already long, and now you have a situation where the market is re-pricing against what the economic outlook is going forward.” said Tom Tucci, head of government bond trading at RBC Capital Markets in New York

Given the swiftness and magnitude of the sell-off, analysts were reluctant to predict where the market would bottom.

Benchmark 10-year notes were trading 1-9/32 lower in price for a yield of 3.29 percent, up from 3.13 percent late on Tuesday.

If the bond market deteriorates further, the 10-year yield could test support in the 3.30 to 3.32 percent area, analysts said.

On the other hand, a market rebound could make the 10-year yield test resistance at 3.10 percent, its 200-day moving average.

“You look back and we’ve seen a couple months of improved economic data, topped off with some fiscal stimulus added on by the tax cut extension. Add a heavy issuance calendar in the final weeks of the year and you get a foolproof recipe for once again repricing the market,” said Robert Tipp, chief investment strategist for Prudential Fixed Income in Newark, New Jersey, which has $240 billion in assets under management.