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NEW YORK (Reuters) - World stocks rose to a three-month high and oil prices jumped on Tuesday as investors bet that policymakers would do more to resolve the euro zone debt crisis and underpin the U.S. economy.
Global markets have enjoyed a strong run this week after the European Central Bank indicated it may start buying government bonds again to ease the pressure on Spain and Italy, albeit under strict conditions that have yet to be fully worked out.
Investors are also watching for signs that the Federal Reserve will take fresh measures to bolster the U.S. economy when it meets next month. Eric Rosengren, president of the Boston Federal Reserve Bank, said on Tuesday the central bank should launch another bond-buying program of whatever size and duration is necessary to get the economy back on its feet.
Rosengren is not a voter this year on the Fed's policy-setting Federal Open Market Committee.
Many analysts expect the Fed could launch a third round of bond-buying, known as quantitative easing, when it meets in mid-September. Richard Fisher, president of the Dallas Fed and a monetary policy hawk, on Monday told Reuters that taking new steps so close to November's presidential election would be a mistake.
Oil prices accelerated to a 12-week high on expectations of further economic stimulus, as well as supply worries linked to falling North Sea output expected in September, Middle East tensions and the Gulf of Mexico hurricane season. Brent crude futures pushed above $111 a barrel.
U.S. stocks ended higher, with the S&P 500 closing above the psychologically important 1,400 level for the first time since early May.
"Lots of people are starting to discount the fundamental issues in Europe and are now embracing risk. Spanish yields have come in, so the fire is not out, but they seem to be containing it better," said David Lutz, head of ETF trading at Stifel Nicolaus Capital Markets in Baltimore.
Highlighting the importance of quick action, data showed that Germany, Europe's economic powerhouse, took a bigger hit than expected in June, with industrial orders falling 1.7 percent. Contracts from the euro zone fell by 4.9 percent.
The cautious hopes that Europe's three-year crisis was edging toward a solution lifted the MSCI world equity index .MIWD00000PUS 0.6 percent to its highest level since early May.
The Dow Jones industrial average .DJI gained 51.09 points, or 0.39 percent, to 13,168.60. The Standard & Poor's 500 Index .SPX rose 7.12 points, or 0.51 percent, to 1,401.35. The Nasdaq Composite Index .IXIC added 25.95 points, or 0.87 percent, to 3,015.86.
Still, volume was light, with about 6.39 billion shares traded on the New York Stock Exchange, the American Stock Exchange and Nasdaq, below last year's daily average of 7.84 billion.
Equities markets have enjoyed renewed demand from investors over the past three months as high-rated government bond returns have fallen sharply due to demand from investors seeking safety from the troubles in Europe, increasing the relative attractiveness of blue-chip stocks.
Expectations of more action from policymakers pushed U.S. Treasuries prices lower. U.S. benchmark 10-year Treasury notes were trading 18/32 lower in price to yield 1.627 percent.
European shares had a choppier day after the disappointing German data, while Italy's recession extended into a fourth consecutive quarter.
Oil stocks got a boost from rising crude prices, helping the FTSEurofirst 300 index .FTEU3 of top European companies finish up 0.8 percent at its highest level in more than four months.
Graphic on Italy output: link.reuters.com/maq56s
Graphic on UK banks: link.reuters.com/guh89s
Reuters video on markets: link.reuters.com/nuj89s
A sharp drop in shares of Standard Chartered Plc (STAN.L) after New York's bank regulator threatened to tear up its state banking license weighed on European bank stocks.
Standard Chartered plummeted more than 16 percent after the New York State Department of Financial Services said the British-based lender hid $250 billion in transactions tied to Iran.
"We're more enthusiastic about oil stocks than banks. Higher oil prices will be beneficial and equity markets are continuing to be supported by the fact that central banks appear ready to ride to the rescue," said Cheviot Asset Management partner David Miller.
Brent crude for September delivery rose $2.45 to settle at $112.00 a barrel, climbing above $110 a barrel for the first time since mid-May. U.S. crude jumped $1.47 to settle at $93.67.
The euro benefited from expectations of help for Spain and Italy most of the day but surrendered gains against the dollar in late afternoon trade.
The euro was recently little changed at $1.2399 after hitting a session peak of $1.2441, according to Reuters data.
Investors remain cautious about the next steps, as ECB action can be triggered only when a country decides its finances are in such bad shape that it needs a bailout, which could arouse new fears about the whole region.
"Skeptics remain and the ECB will have to replace rhetoric with action sooner (rather) than later for this upward move to gain any momentum," said Matthew Lifson, senior trader and analyst at Cambridge Mercantile Group in Princeton, New Jersey. "There are still people predicting the $1.2000 level in the euro by year end."
The ECB could resume bond buying - possibly as soon as September - that will target shorter-dated sovereign debt and aim to complement the combined firepower of the region's two bailout funds while keeping the pressure on governments to reform.
But the euro zone's new permanent bailout fund has yet to be formally approved by paymaster Germany, and rules governing any ECB bond buying still have to be agreed by internal committees at the central bank.
Additional reporting by Sudip Kar-Gupta in London and Gertrude Chavez-Dreyfuss and Anna Louie Sussman in New York; Editing by Dan Grebler