GLOBAL MARKETS-World stocks, dollar gain after US housing data

* Strong U.S. housing data drives stocks, dollar higher

* MSCI world equity index at highest since Oct. 6

* Euro zone services, manufacturing PMI improve (Updates with U.S. market activity, changes byline, dateline previously London)

By Al Yoon

NEW YORK, Aug 21 (Reuters) - World stocks and the dollar rose on Friday after a sharp jump in U.S. home sales and an optimistic outlook from Federal Reserve Chairman Ben Bernanke stoked optimism of a global economic recovery.

European shares rose to their highest close since early November and the euro rose to its highest level against sterling in nearly one month after a euro zone manufacturing and services survey showed more improvement than expected.

A 7.2 percent rise in U.S. existing home sales in July that resulted in the fastest sales pace in two years, reported by the National Association of Realtors, further ignited markets. It was the fourth straight monthly rise and signaled that the end could be in sight for dropping home values and rising defaults.

"Cracking set of home sales from the U.S.," said Jim Wood-Smith, head of research at London-based Williams de Broe. "It is more fuel on the fire of the bull market."

Comments by Bernanke at a Fed conference that prospects for a return to global growth appeared good in the near term, even though growth is likely to be slow and unemployment to remain high, fueled the positive sentiment.

U.S. stocks rose to their highest levels of the year. The Dow Jones industrials average rose 1.5 percent to 9,486.23 points, while the Standard & Poor's 500 index increased 1.6 percent to 1023.42 points, its highest in 10 months. The Nasdaq composite rose 1.1 percent to 2,011.09 points.

U.S. home builders were among the strongest gainers, with the Dow Jones home construction index up 2.99 percent. D.R. Horton jumped 4 percent to $12.73 and luxury builder Toll Brothers gained 3.8 percent to $22.74.

In Europe, banking stocks led gains. The European FTSEurofirst 300 index gained 2.3 percent. The index is up nearly 50 percent since reaching a lifetime low in early March and is up about 16 percent for the year.

The decline in the euro zone's dominant services sector almost came to a halt in August, and businesses' expectations for the future soared to their highest level in more than two years, according to a survey by Markit.

Swiss bank UBS rose 6.4 percent after the group said it sees a strong recovery in the Australian wealth management market in 12 to 18 months and expects consolidation at the higher-end of the business as the market recovers from a period of turbulence.

BNP Paribas, Banco Santander and HSBC were 2 to 5.9 percent higher.

The MSCI world equity index increased 1.49 percent to 274.10, it highest since its freefall in during the flashpoint of the financial crisis in October 2008.

Emerging stocks rose 1.2 percent. Chinese stocks climbed 1.7 percent, led by banks after earnings.

"The most decisive thing now is the Chinese stock market, and as long as the Chinese market holds up, the risky assets will hold as well," said Koen De Leus, economist at KBC Securities, the equities arm of Europe's KBC Group.

DOLLAR HIGHER

The U.S. dollar rose versus the yen on Friday after the U.S. data and the Fed comments supported views of a global economic recovery and increased risk appetite among investors. This push prices lower and yields higher on U.S. Treasury bonds, which reflected concerns about growing supply of national debt and the inflation it might bring.

Benchmark 10-year Treasury note yields rose 0.12 percentage point to 3.55 percent. The 10-year euro zone government bond yield rose 0.06 percentage point to 3.32 percent.

The dollar at midday in New York climbed 0.5 percent at 94.63 yen, near a session high, after trading as low as 93.40 yen earlier.

The euro initially extended its advance versus the dollar after the headlines but it gave up most of those gains to trade last up 0.4 percent at $1.4302. It rose to 86.82 pence, its highest in nearly one month. (Reporting by Reuters staff worldwide; Editing by Leslie Adler)