GLOBAL MARKETS-Europe shares set for best quarter in 10 yrs

* European shares on track to post best qtr in nearly 10 yrs

* World stocks up 18 pct in Q3 after 21 pct rise last qtr

* Commodity prices firm, dollar falls

By Dominic Lau

LONDON, Sept 30 (Reuters) - European shares look set to finish the third quarter with their best performance in nearly a decade on expectations of economic recovery while world stocks also rose strongly though not as much as in the previous period. The pan-European FTSEurofirst 300 <.FTEU3> index put on 0.5 percent on Wednesday and the MSCI world index <.MIWD00000PUS> added 0.7 percent, while commodity prices were also firmer, helped by a weaker dollar.

Equities have been rallying hard since early March as investors have become more confident about economic recovery.

German unemployment fell for a third consecutive month in September. U.S. non-farm payrolls data is due on Friday and will do much to dictate market direction in the short-term before the third quarter company earnings seasons gets into gear.

The European benchmark index is up 18.5 percent in July-September, on course to record its biggest quarterly rise since December 1999. It rose nearly 16 percent in the previous quarter but is still 38.4 percent below its peak in mid-2007.

Global stocks gained 17.9 percent this quarter after rising more than 21 percent in April-June, its best ever quarterly rise, while Britain's FTSE 100 <.FTSE> was set to register its best quarterly gains since the index was launched in 1984.

"The next big hurdle for the market to overcome could be the third quarter reporting season. If it is as supportive as the second quarter was and allowed brokers to continue to be aggressive in terms of their upgrades, then certainly we have potential to add to this (rally)," said Henk Potts, equity strategist at Barclays Stockbrokers.

U.S. stock index futures were up 0.4 percent, pointing to a firmer start for Wall Street. The S&P 500 <.SPX>, up 15.4 percent so far this quarter, is making a run for its best quarterly performance since the last quarter of 1998.

The corporate outlook has showed signs of revival, with the world economy recovering from its worst recession since the 1930s Great Depression.

British retailer Marks & Spencer on Wednesday posted an improvement in its quarterly sales trend and raised its forecast for full-year profit margin, but cautioned 2010 was likely to be a tough year. [ID:nLT484259]

The International Monetary Fund on Wednesday lowered its estimate for global writedowns for banks and other financial institutions to roughly $3.4 trillion from $4 trillion but warned that loan losses were set to rise as unemployment and associated delinquencies increase. [ID:nLU99400]

DOLLAR WEAK

Crude prices were higher, rising near $68 a barrel as the dollar eased, with investors focusing on Iran's nuclear plans.

Metal prices also stayed firm, helped by the weaker dollar. Gold rose above $1,000 an ounce and was poised to post its best quarterly performance since the first quarter of 2008.

The U.S. dollar <.DXY> slipped against major currencies on month- and quarter-end buying lifting sterling and the yen. The greenback was down 0.7 percent at 89.51 yen.

The euro extended gains against the dollar after the European Central Bank allotted just 75 billion euros of one-year funds at its second such tender, considerably less than the market was expecting.

It suggests banks may now have greater confidence in their liquidity needs and are no longer as dependent on the ECB for funding. [ID:nLU128853]

"The economy has turned a corner and the bottom line is that central banks are making the first tentative steps towards unwinding the emergency liquidity programmes, and maybe the ECB will do so in the next few months as well," said Kenneth Broux, finanical markets economist at Lloyds Banking Group in London.

Yields on benchmark 10-year U.S. Treasuries were up 3 basis points at 3.320 percent, while the 10-year euro zone Bund yield was up 2 basis points at 3.239 percent. (Additional reporting by Atul Prakash and Jamie McGeever in London, editing by Mike Peacock)