(Updates prices, adds comment, details)
* Spain signals distress over rising borrowing costs
* G7 agrees to work together to deal with debt crisis
* U.S. services sector rises modestly in May
By Wanfeng Zhou
NEW YORK, June 5 (Reuters) - World stocks edged higher on Tuesday after data showed the U.S. services sector grew at a slightly faster pace in May, but the euro zone crisis appeared to be escalating as Spain said it was being shut out of credit markets.
The better-than-expected U.S. data dented safe-haven demand for U.S. Treasuries, pushing yields back above record lows.
German debt prices rose after Spain's treasury minister said the country's high borrowing costs meant credit markets were closing to the euro zone's fourth biggest economy.
Cristobal Montoro made an appeal to the European Union to help Madrid recapitalise its debt-laden banks.
The Group of Seven finance chiefs agreed in a teleconference call on Tuesday to work together to deal with the problems besetting Spain and Greece, but the meeting had little impact on financial markets.
The MSCI world equity index rose 0.4 percent to 292.31 points.
"Europe's obviously a concern, but we've been selling off for weeks on that," said Peter Boockvar, equity strategist at Miller Tabak & Co. in New York. "A slightly better than expected services number, which makes the majority of the U.S. economy, is a sigh of relief in the face of a lot of bearishness."
U.S. stocks were little changed in late morning trading. The Dow Jones industrial average was down 3.21 points, or 0.03 percent, at 12,098.25. The Standard & Poor's 500 Index was up 2.26 points, or 0.18 percent, at 1,280.44. The Nasdaq Composite Index was up 3.81 points, or 0.14 percent, at 2,763.82.
The pace of growth in the vast U.S. services sector picked up a tad in May as a gauge of new orders improved, according to an industry report released on Tuesday.
The euro zone's blue-chip Euro STOXX 50 index gained 0.8 percent, with volumes thinned by a second day of UK public holidays.
After Tuesday's G7 finance ministers conference call, investors are now waiting for the ECB policy meeting on Wednesday, Federal Reserve chairman Bernanke's testimony to the U.S. Congress on Thursday, and the Greek elections and G20 meeting in Mexico which are both on the weekend of June 17."
Funding options are narrowing for companies across the globe, as issuers are shut out of markets due to risk aversion for weaker credits and demand for spread that is sending costs soaring.
EURO ZONE IN DECLINE
The euro, which early in the day hit a one-week high of $1.2542, fell 0.3 percent to $1.2459. Investors were disappointed that the G7 released no statement following the meeting.
"Their lips are sealed which tells us that they are either working on something big or failed to reach an agreement," said Kathy Lien, director of currency research at GFT in Jersey City. "Spain has become as much of a problem as Greece and for this reason policymakers can't leave things as they currently are for much longer."
The risk premium investors demand to hold Spanish 10-year debt rather than safe haven German bonds hit a euro era high of 548 basis points on Friday, on concerns that it will eventually be forced to seek a Greek-style bailout.
Spain will test the market on Thursday by issuing between 1 billion euros ($1.24 billion) and 2 billion euros in medium- and long-term bonds at auction.
Adding to the bearish sentiment, all of the euro zone's major economies are now in various states of decline, according to business surveys that heaped more pressure on Europe's leaders to stop the region becoming the centre of a new global crisis.
The dollar rose 0.4 percent to 78.65 yen, hitting a session high after Japan's Finance Minister Jun Azumi said a strong yen is damaging Japan's economy.
Brent crude prices fell 6 cents to $98.79 a barrel, after they briefly hit a 16-month low of $95.63 on Monday. U.S. crude gained 17 cents to $84.15.
Spot gold was little changed at $1,619.06 an ounce, off a low of $1,612 an ounce.
The benchmark 10-year U.S. Treasury note was down 9/32 in price with the yield at 1.5542 percent. (Additional reporting by Rodrigo Campos in New York, Shankar Ramakrishnan from IFR and Richard Hubbard in London; Editing by Andrew Hay)