* 10-year yields at 2.56 pct after falling most since 1987

* Fed to buy $300 bln in Treasuries, $1.75 trln total debt

* Some profit-taking in Asia, but analysts bullish

SYDNEY, March 19 (Reuters) - U.S. Treasury yields remained sharply lower in Asia on Thursday, having plunged by the most in 26 years the previous session, after the Federal Reserve staggered markets by announcing it would buy government debt. Yields on the 10-year note were down at 2.56 percent, having collapsed from 3.01 percent just before the Fed announced it would buy $300 billion in Treasuries over the next six months.

This would be the first time it bought government debt in size since the early 1960s and marked a major expansion into the exotic world of quantitative easing.

“The decision sparked an enormous rally in Treasuries,” said Rory Robertson, interest rate strategist at Macquarie. “The market in one fell swoop taking the yield halfway back to its generational lows near 2 percent, seen late in 2008.”

That in turn brought 30-year mortgage rates down to near 5.0 percent, the lowest in generations. Two-year yields were at 85 basis points, compared to 1.03 percent early Wednesday.

The Fed also expanded its planned purchases of agency mortgage-backed securities by $750 billion and of agency debt by $100 billion. All combined, it will be buying $1.75 trillion of debt, up from $600 billion previously. [ID:nN18702579]

The Fed had floated the idea of buying Treasuries some time ago, but recently seemed to go cold on the idea. Thus, the sudden change of direction took most investors completely by surprise. “While we knew the Fed could buy Treasuries, and indeed thought that at some point they would buy them, we -- like others -- were taken aback by today’s ramping of the printing press,” wrote analysts at UBS.

The Fed will concentrate its buying in the two-year to 10-year sector, though purchases will occur across the Treasury and TIPS curve. The buying will be by competitive auctions, with two to three auctions a week likely. The first auction will occur late next week. It follows the Bank of England’s move to buy 75 billion pounds ($104 billion) of gilts and the Bank of Japan’s decision on Wednesday to increase purchases of Japanese government debt.

There were some concerns that all this printing of money would ultimately produce inflation, but for now central banks seemed far more concered with avoiding deflation.

“The Fed’s thinking is that the scenario of deep and prolonged recession, and thus the growing risk of deflation, is much more to be feared than the -- exaggerated -- risk of excessive inflation down the track,” said Robertson at Macquarie.

That in turn, left him bullish on sovereign debt.

“My big-picture story remains that government bond yields in across the G7 probably will go to new generational lows as unemployment heads into double-digits across the U.S., the UK and Europe, and global deflation pressures continue to mount,” said Robertson. (Reporting by Wayne Cole; Editing by Jonathan Standing)