GLOBAL MARKETS-World stocks rally on M&A; oil up on Middle East

* M&A activity supports global shares

* Wall Street opens higher

* Euro slips back after hitting multi-month highs

* Oill hits 2-1/2-year highs on Middle East unrest (Updates with Wall Street open, prices; changes byline, dateline previously LONDON)

By Leah Schnurr and Jeremy Gaunt

NEW YORK/LONDON, April 4 (Reuters) - Merger and acquisition activity helped lift global equities on Monday, though Wall Street struggled to maintain gains in early trade

Crude oil prices hit 2-1/2-year highs as the unrest in Libya continued to unnerve investors.

Expectations that the European Central Bank will raise euro zone interest rates at its meeting on Thursday drove the euro briefly to an 11-month high against the Japanese yen, but later slipped because expectations of higher rates have already been priced in.

World stocks as measured by MSCI <.MIWD00000PUS> were up 0.6 percent, rising to the highest level in more than a month and up more than 5 percent for the year to date.

In the latest acquisition news, Pfizer Inc rose 0.8 percent to $20.54 after the drugmaker agreed to sell its Capsugel unit, the world's largest maker of hard capsules, to private equity firm KKR & Co for nearly $2.4 billion.

And in Europe Belgian chemicals group Solvay launched a bid for French rival Rhodia , driving up Rhodia's shares 48 percent. For details, see [ID:nLDE66P0SY]

Vodafone rose after selling its 44 percent stake in France's second biggest telecom operator SFR to Vivendi . [ID:nLDE73319N]

On Wall Street the broad S&P 500 <.SPX> faced levels where selling has clustered in recent sessions, hovering just above 1,333, a level that it has been unable to close above since mid-February.

The Dow Jones industrial average <.DJI> was up 11.88 points, or 0.10 percent, at 12,388.60. The Standard & Poor's 500 Index <.SPX> was up 0.91 points, or 0.07 percent, at 1,333.32. The Nasdaq Composite Index <.IXIC> was down 1.51 points, or 0.05 percent, at 2,788.09.

On Friday, the S&P recorded its best two-week period since December, and the Dow industrials <.DJI> hit the highest intraday level since June 2008.

European stocks added to three-week highs hit Friday with a 0.2 percent rise for the FTSEurofirst 300 <.FTEU3>. Japan's Nikkei <.N225> closed up 0.1 percent.

The improving macroeconomic backdrop has been primarily responsible for the bounce-back in equities after tumbling in March on Japan's disaster and unrest in North Africa and the Middle East.

The economic growth improvement has cemented expectations that the ECB will raise interest rates Thursday and led to speculation the U.S. Federal Reserve may be getting closer to withdrawing exceptional liquidity. [ID:nLDE7330AC]

"As the economy turns the corner and gets back on its feet, central bankers are beginning to see inflation as a greater threat than lack of growth," said Jonathan Sudaria, dealer at Capital Spreads.

RATES DRIVE EURO

Reflecting expectations of differing rate paths, the euro hit 11-month highs against the yen and touched a five-month peak against the dollar. The single currency later slipped back with expectations of an increase in rates already priced in by investors.

In contrast to the ECB, the Bank of Japan is likely to downgrade its economic assessment at its meeting Wednesday and may consider finding more ways to help the economy recover from last month's massive earthquake and devastating tsunami.

Key euro-priced bank-to-bank lending rates hit new 21-month highs Monday, boosted by rate hike expectations. [ID:nLDE7330V9]

The euro briefly popped above 120 yen for the first time since May 2010 and was later at 119.55 yen. It hit a five-month high against the dollar of $1.4269 and was later at $1.42138 .

"I think the euro is close to putting in a top now as the monetary policy divergence story is almost fully priced," said Lee Hardman, currency strategist at BTM-UFJ.

There was little respite for the euro zone periphery's bond sector with Fitch cutting Portugal's credit ratings by three notches to BBB-minus late Friday, one notch above junk, and signaling further downgrades are likely.

Traders also said Spanish Prime Minister Jose Luis Rodriguez Zapatero's decision not to seek a third term in 2012 elections would raise questions over Madrid's future commitment to economic reforms.

In commodities markets, North Sea Brent crude oil hit a 2-1/2-year high of almost $120 a barrel on Monday as the unrest in the Middle East and North Africa kept the focus on oil supplies as economic growth bolstered demand for fuel.

"The focus remains on headlines out of the Middle East," said Edward Meir, senior commodity analyst at brokers MF Global, despite what he called a "less-than-compelling fundamental backdrop."

ICE Brent rose $1.25 to a high of $119.95 a barrel, its highest since August 2008, before slipping back to trade around $119.70 by 1345 GMT. U.S. crude was up 20 cents at $108.14 a barrel by 1345 GMT, after touching $108.78 earlier in the session, its highest since September 2008.

Analysts say the loss of oil from Libya has been more or less offset by Saudi Arabia, while the Japanese crisis should also reduce oil import demand, suggesting "there likely is a statistical surplus in the system right now", Meir said. (Reporting by Leah Schnurr; Additional reporting by Kirsten Donovan, Neal Armstrong, Ian Chua and Masayuki Kitano; Editing by Leslie Adler)