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NEW YORK (Reuters) - World stocks rose and the euro gained on Tuesday amid optimism the world's major central banks will provide more economic stimulus as the euro zone debt crisis worsens.
The U.S. Federal Reserve on Tuesday began a two-day policy-setting meeting, with investors focused on whether it will unveil any more stimulus to support the lackluster recovery.
Analysts expect the Fed to extend its long-term bond-buying through "Operation Twist" by a few months from its planned end later in June. Expectations of further stimulus from the Fed pressured the U.S. dollar.
Investors have been worried about the impact of the euro zone debt crisis on the global economy, particularly as U.S. economic growth appears to be losing momentum.
U.S. stocks ended up sharply, while world stocks, as measured by the MSCI's all-country world equity index .MIWD00000PUS climbed 1.3 percent.
The euro was last up 0.9 percent at $1.2689 after hitting session highs above $1.27.
"People are anticipating some type of response from the Fed tomorrow and are buying or covering shorts in anticipation of that," said Paul Zemsky, head of asset allocation at ING Investment Management in New York.
A Fed statement is due after the meeting ends on Wednesday, usually around 2:15 p.m. EST (1815 GMT).
A surprise fall in British inflation strengthened the chance of steps from the Bank of England to support the UK economy as it feels the heat of the euro zone's problems.
Also, British media reports said German Chancellor Angela Merkel was poised to use Europe's dual bailout funds, known as the European Financial Stability Facility, or EFSF, and the European Stability Mechanism, or ESM, to buy up the debt of countries like Italy and Spain.
But a German government official told Reuters there was no discussion at a G20 summit in Mexico this week about using Europe's rescue funds to buy the bonds of stricken members of the euro zone.
Growth-related stocks led Wall Street's rally, with the S&P materials sector .GSPM up 2 percent and the financial sector .GSPF up 1.7 percent. U.S. Steel Corp (X.N) jumped 9.5 percent to $20.15 and Bank of America (BAC.N) added 4.5 percent to $8.11.
The Dow Jones industrial average .DJI added 95.51 points, or 0.75 percent, at 12,837.33. The Standard & Poor's 500 Index .SPX was up 13.20 points, or 0.98 percent, at 1,357.98. The Nasdaq Composite Index .IXIC was up 34.43 points, or 1.19 percent, at 2,929.76.
The pan-European FTSEurofirst 300 .FTEU3 added 1.6 percent while Spain's IBEX .IBEX rose 2.7 percent.
Concerns mounted over a sharp rise in Spain's short-term borrowing costs, a big fall in German investor confidence and Greece's commitment to its bailout plan.
German economic sentiment posted its biggest drop since 1998 this month, data showed.
Spain came closer to becoming the largest euro zone country yet to be shut out of credit markets when it had to pay a euro era record price to sell short-term debt.
The euro zone's fourth-largest economy had to pay 5.07 percent to sell 12-month Treasury bills and 5.11 percent to sell 18-month paper - an increase of about 200 basis points on the last auction for the same maturities a month ago. Yields on longer-term bonds rose over 7.0 percent recently.
On Monday, initial enthusiasm over a weekend victory for pro-bailout parties in Greek elections gave way to worry about the nagging debt crisis still facing the euro zone
In the oil market, Brent crude oil futures ended lower as European supplies remain ample. In London, ICE Brent crude for August delivery ended down 29 cents, or 0.30 percent, at $95.76 a barrel, the lowest settlement for front-month Brent since January 25, 2011.
U.S. crude futures rebounded on optimism about further Fed stimulus. NYMEX crude for July delivery settled at $84.03 a barrel, up 76 cents.
U.S. Treasury prices fell as some investors closed out profitable positions before the Fed decision. U.S. benchmark 10-year notes were last down 14/32 in price to yield 1.62 percent, up from 1.57 percent late on Monday.
Gold prices eased for the first time in eight days ahead of the Fed statement. Spot gold was down 0.5 percent at $1,620.31 an ounce.