* Euro advances as China affirms FX diversification policy
* China refutes report it's reviewing euro bond holdings
* Bargain-hunting helps global stocks gain traction
By Daniel Bases
NEW YORK, May 27 (Reuters) - The euro and global stock markets surged higher on Thursday, bolstered by China's knock-down of a report saying it was looking to cut its holdings of euro zone sovereign debt.
The People's Bank of China's assertion that Europe is a key investment market for its foreign exchange reserves helped lift the euro from near four year lows. The central bank called the Financial Times report on Wednesday groundless.
"The fact that they came out with a statement today suggesting they're not going to sell the euro doesn't mean that they're not concerned. But they're looking at the euro from a long-term perspective and the base-case scenario is that the euro zone is not going to crack," said David Watt, senior currency strategist, at RBC Capital Markets in Toronto.
Commodity prices rose as the dollar fell, with the added benefit of improving U.S. oil demand and a drop in crude stockpiles. Gold rose slightly.
U.S. and European stock markets extended gains while government debt prices fell as risk appetite favored equities. Bargain hunters picked through the beaten-down market felled by fears Europe's debt crisis could spark a credit crunch and undermine the global economic recovery.
"The market is bouncing off oversold, but I think the big catalyst this morning is comments coming out of China that tempered concerns about the Chinese government possibly trimming back its $600 billion plus of euro zone bond holdings," said Fred Dickson, chief market strategist at D.A. Davidson & Co in Lake Oswego, New York.
In late morning in New York, the Dow Jones industrial average <.DJI> was up 219.99 points, or 2.21 percent, at 10,194.44. The Standard & Poor's 500 Index <.SPX> was up 26.89 points, or 2.52 percent, at 1,094.84. The Nasdaq Composite Index <.IXIC> was up 63.06 points, or 2.87 percent, at 2,258.94.
Equity markets shrugged off a report showing the U.S. economy grew at a slower pace than previously estimated in the first quarter as business investment slackened. [ID:nN27259780]
Heading into the close of European trade, the pan-European FTSEurofirst 300 index <.FTEU3> rose 2.76 percent to 998.82, its best level in a week. However, the index remains down around 10 percent from a mid-April peak on worries about Europe's debt crisis.
MSCI's all-country world stock index <.MIWD00000PUS> rose 2.52 percent.
A Reuters poll out Thursday showed institutional investors held onto their equities exposure more than might have been thought in May, given extreme volatility on financial markets, but also put more money in safe-haven cash. [ID:nLDE64Q0FM]
EURO GAINS
The euro rose 0.71 percent at $1.2253 while the dollar fell against a basket of major trading-partner currencies, with the U.S. dollar index <.DXY> down 0.32 percent at 86.838.
China has been trying to diversify its currency reserves to reduce the dollar's dominance in favor of the euro and yen to curb risks.
On Wednesday the euro collapsed 1.5 percent after the Financial Times reported China's State Administration of Foreign Exchange (SAFE) was meeting foreign bankers because of concerns about its exposure to debt troubles in Europe.
SAFE, the arm of the central bank, manages China's $2.4 trillion in foreign exchange reserves -- the world's largest stockpile.
Separately, the Kuwaiti Investment Authority denied a local media report that it too was reducing its exposure to euro zone investments. The sovereign wealth fund stated there was no change to its long-term investment strategy including Europe.
The initial reports did cut the euro's gains but the currency has since recovered ground.
In response to the better risk appetite, safe-haven
benchmark 10-year U.S. Treasuries traded 1-10/32 lower, driving
the yield up to 3.34 percent
Euro zone government bond futures hit a session low of
128.17, 55 basis points lower on the day
U.S. light sweet crude oil