Oil rises on ECB rate comments, U.S. stocks rally

By Herbert Lash

NEW YORK (Reuters) - Crude oil shot up more than 4 percent, the dollar and government bonds fell on Thursday after European Central Banker Jean-Claude Trichet made unusually candid remarks that interest rates will likely rise in Europe.

Wall Street stocks ignored recent worries about inflation and interest rates and jumped to their biggest gain since mid-April. Oil stocks energized a rally sparked early in the day by moderately favourable economic data,

Yields soared on bonds in the euro zone after European Central Bank President Jean-Claude Trichet shocked investors by saying interest rates may go up as early as July.

The ECB left rates on hold at 4 percent as expected, but Trichet's comments sent shock waves across asset classes.

Oil was slow to react but investors covering positions that had bet crude would stay on a downtrend helped push prices up to peaks over $128 a barrel. The day's gain was the biggest percentage rise since March 26.

U.S. stocks also soared in late trading, rising almost 2 percent, led by a surge in super-major oil companies Exxon Mobil, Chevron and ConocoPhillips. The S&P Energy Index .GSPE rose more than 4 percent.

The Dow Jones industrial average .DJI gained 213.97 points, or 1.73 percent, at 12,604.45. The Standard & Poor's 500 Index .SPX advanced 26.82 points, or 1.95 percent, at 1,404.02. The Nasdaq Composite Index .IXIC climbed 46.80 points, or 1.87 percent, at 2,549.94.

In Europe the yield on two-year government bonds rocketed more than 30 basis points to its highest this decade, 10-year yields hit 4.50 percent for the first time in nearly a year and several interest rate futures contracts had their steepest one-day declines ever.