(Updates with afternoon trading)
* Oil prices rise over 2 pct
* European shares hurt by auto sector
* Dollar rises against basket of currencies
* Prices for Treasuries, gold drop
By Lewis Krauskopf
NEW YORK, Jan 14 (Reuters) - The energy sector led the beaten-up U.S. stock market higher on Thursday as oil prices rebounded from 12-year lows.
Major U.S. indexes climbed about 2 percent after dropping to 3-1/2 month lows on Wednesday. Gains in stocks and oil also helped push the U.S. dollar higher, while the increases in risk assets reduced demand for safe-haven gold and U.S. government debt.
Equity markets have tumbled to start the year as volatility in Chinese shares and the persistent slide in oil made investors jittery about the health of the global economy.
“Oil has been able to hold the gains, and I think that has just given a little confidence for people to come back into the market today,” said Maury Fertig, chief investment officer at Relative Value Partners in Northbrook, Illinois.
The Dow Jones industrial average was up 305.72 points, or 1.89 percent, to 16,457.13, the S&P 500 gained 41.18 points, or 2.18 percent, to 1,931.46 and the Nasdaq Composite added 119.94 points, or 2.65 percent, to 4,646.01.
The U.S. energy group surged 4.9 percent, leading all sectors.
Investors were also encouraged by comments from St. Louis Federal Reserve President James Bullard, who said the oil rout has caused a “worrisome” drop in U.S. inflation expectations that may make further rate hikes hard to justify.
The Fed will raise interest rates three times this year, a Reuters poll of economists found.
Better-than-expected results from JP Morgan gave a boost to what is expected to be a dour U.S. corporate earnings season.
Investors have pointed to oversold conditions priming the stock market for a rebound, but rallies have tended to fizzle to start 2016.
“We’ve been looking for some sort of bounce for a while now,” said Scott Brown, chief economist at Raymond James in St. Petersburg, Florida.
The pan-European FTSEurofirst 300 index dropped 1.5 percent, hurt by a slump in the auto sector as Renault faced an emissions probe, but the index came off its 13-month lows.
MSCI’s broadest gauge of stocks globally rose 0.5 percent.
Benchmark Brent oil snapped an eight-day rout as some players covered short positions after crude prices plumbed new 12-year lows on worries that Iran may add its barrels to a glutted global market sooner than expected.
Traders said options expiry for the front-month contract in U.S. crude, scheduled at Thursday’s settlement, was also pushing players to cover positions.
“Natural covering interest is buoying the market as many had $30 as an objective,” said Pete Donovan, broker at Liquidity Energy in New York.
U.S. crude prices settled up 2.4 percent at $31.20 a barrel, while Brent crude settled up 2.4 percent at $31.03 a barrel.
The dollar rose, bolstered by gains in the U.S. stock market and a rebound in oil prices, suggesting that the Federal Reserve will not be as constrained to push ahead with its plan to raise interest rates several times this year.
The U.S. dollar rose 0.2 percent against a basket of currencies, while the euro fell 0.2 percent against the dollar.
Prices on U.S. Treasuries fell as oil prices steadied. Benchmark 10-year U.S. Treasury notes fell 14/32 in price to yield 2.1137 percent, from 2.066 late on Wednesday.
Spot gold fell 1.8 percent as the oil price rebound and rise in U.S. shares blunted bullion’s appeal as a haven.
Additional reporting by Tariro Mzezewa, Barani Krishnan and Gertrude Chavez-Dreyfuss in New York, Ankur Banerjee and Abhiram Nandakumar in Bengaluru, Marc Jones in London, Lisa Twaronite in Tokyo; Editing by Kevin Liffey, Raissa Kasolowsky and Nick Zieminski