* MSCI world equity index down 0.5 percent at 204.45
* European shares, U.S. stock futures rise; Asia lower
* Government bonds supported; yen hits 5-week high vs dollar
By Natsuko Waki
LONDON, Dec 2 (Reuters) - European shares and U.S. stock futures rallied in a volatile session on Tuesday, while oil recovered from 2-1/2 year lows as expectations grew for more government and central bank steps to counter economic downturn.
A positive trading update from Tesco raised expectations some retailers could withstand a consumer downturn, while hopes for a U.S. auto industry bailout boosted General Motors shares before the bell, helping broader markets.
"What you are likely to see is a snap-back rally after yesterday's big sell-off," said Andre Bakhos, president of Princeton Financial Group in Princeton, New Jersey.
MSCI world equity index fell 0.5 percent, while FTSEurofirst 300 index of leading European shares rose 0.7 percent, erasing earlier losses. Tesco rose more than 9 percent.
U.S. stock futures rose 1.6 percent, pointing to a firmer start on Wall Street.
Earlier, Australia cut interest rates by a bigger-than-expected full percentage point while the Bank of Japan expanded lending in an emergency meeting to ease a year-end cash crunch.
Britain, the euro zone and New Zealand are also seen lowering the cost of borrowing with speculation these central banks could also surprise with aggressive rate cuts. Sweden is also expected to cut rates at Wednesday's meeting, brought forward by two weeks.
Executives of the big-three U.S. automakers, including Chrysler, are due to make another plea for a $25 billion bailout before Congress later on Tuesday as fears about possible bankruptcy persist.
Shares also rebounding before the opening bell included Citigroup and Bank of America, which were top casualties in Monday's slide.
Emerging stocks fell 2 percent.
U.S. crude oil rose 0.1 percent to $49.33 a barrel, after hitting the 3-1/2 year low of $47.36 earlier.
YEN, BONDS FIRMER
Before mid-morning recovery, stocks were down after Monday's confirmation that the United States had entered recession in December 2007 and the Wall Street Journal's report that Goldman Sachs is likely to announce a fourth-quarter net loss of as much as $2 billion.
The low-yielding Japanese currency rose as high as 92.64 per dollar -- only a couple of yen away from the level where Group of Seven finance chiefs issued a warning about excessive yen strength in October.
The benchmark 10-year euro zone government bond yield fell to 3.09 percent, a low last seen in September 2005. The December bund futures rose 41 ticks.
The benchmark 10-year U.S. Treasury yield stood at 2.7169 percent, after falling to about 2.65 percent on Monday -- its lowest in 50 years.
Governments around the world are borrowing heavily to finance their fiscal stimulus packages, raising some concerns about their ability to service the debt.
The cost of protecting U.S., UK and several major euro zone governments' debt against default jumped to record highs, according to credit data company CMA DataVision.
Five-year credit default swaps on UK government debt jumped 7 basis points to 106.4 bps, while the 10-year U.S. Treasury CDS hit a record 66.4 bps.
Bond prices rose after Fed chairman Ben Bernanke signalled the central bank could buy government and agency bonds in order to influence yields and stimulate demand. "A year with such horrific portfolio performance -- the worst for both the long-only bond community and the hedge fund crowd -- naturally encourages a more defensive posture going into the final lap," Barclays said in a note to clients.
"When this conservative inclination coincides with a technical balance-sheet driven liquidity deficit and unorthodox central bank activity, Treasury yield curves may well continue their bullish flattening trend into December 31."
The dollar was down 0.2 percent against a basket of major currencies. (Additional reporting by Brian Gorman; editing by Stephen Nisbet)