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LONDON, Sept 30 (Reuters) - British interest rate futures and short-dated gilts rallied on Tuesday as investors sought safe harbours after U.S. lawmakers rejected the $700 billion U.S. credit rescue plan.

Long-dated gilts fell, however, steepening the yield curve, as investors fretted about the potential for increased government debt supply.

The Dow Jones industrial average fell 7 percent on Monday, posting its biggest ever one-day points loss, as the unexpected rejection of the financial bailout plan raised fears about the future of global markets and the economy.

Early losses on European markets were less severe than feared, with the FTSEurofirst 300 index just over 1 percent lower at 0748 GMT.

The long gilt future was 10 ticks lower at 112.60, paring some of the previous session's hefty gains. In the cash market, the two-year gilt yield was 6 basis points lower at 3.94 percent while the yield on 10-year gilts was 1 basis points higher at 4.40 percent.

"We've seeing a massive curve steepening move," said Jason Simpson, gilts strategist at RBS. "There's a big flight to quality at the front end but the back-end is failing to keep up."

Short sterling interest rate futures were volatile in early trade, initially rising as much as 10 ticks before paring gains to stand flat to 3 ticks higher.

A final reading of UK second quarter GDP is due at 0830 GMT. Analysts expect the figures to confirm Britain's economy failed to grow in the April to June period for the first time since the recession of the early 1990s. Keywords: MARKETS BRITAIN GILTS

tf.TFN-Europe_newsdesk@thomson.com

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