* U.S. data points to strengthening economy * S&P 500 hits highest level in five years * Dollar rises 1 percent against Japanese yen * Crude prices rise on violence in Algeria, Mali By Ryan Vlastelica NEW YORK, Jan 17 (Reuters) - Global equity markets rallied on Thursday while the dollar pared losses against the euro as surprisingly strong U.S. housing and labor market data signaled strength in the world's largest economy. Strong demand at a Spanish debt auction added to bullish sentiment on riskier assets, while crude oil prices climbed. The S&P 500 hit levels not seen since late December of 2007 as reports showed new claims for U.S. unemployment benefits tumbled to a five-year low last week and housing starts surged last month. "The unemployment claims were nice, the housing starts were nice, so that is positive for us. There are some good positive vibes out there," said Harry Clark, chief executive of Clark Capital Management Group in Philadelphia. The Dow Jones industrial average was up 96.90 points, or 0.72 percent, at 13,608.13. The Standard & Poor's 500 Index was up 9.42 points, or 0.64 percent, at 1,482.05. The Nasdaq Composite Index was up 19.69 points, or 0.63 percent, at 3,137.23. World stock markets, which have largely drifted sideways this week, rose 0.5 percent and were on track to hit a 20-month high. European shares closed 0.5 percent higher. In Europe, the main focus was on Spain's success in selling 4.5 billion euros ($6 billion) of new bonds at a lower cost than in the previous auction, signaling growing confidence among investors in the outlook for the recession-hit euro area. Spanish 10-year yields edged higher on the day at 5.078 percent but were down from a session high of 5.174. Equivalent Italian yields were near session lows at 4.183 percent. The benchmark 10-year U.S. Treasury note was down 17/32, the yield at 1.8786 percent. The U.S. dollar extended gains versus the yen and pared losses versus the euro after the strong U.S. data. The greenback last traded at 89.84 yen, jumping 1.5 percent on the day. The dollar fell 0.4 percent versus the euro at $1.3348, down from a euro session high of $1.3378. The euro and the dollar were already higher against the yen after Japanese Economy Minister Akira Amari was quoted as saying his recent comments on the negative impact of a weak yen had been misinterpreted. The yen has been falling ahead of a Bank of Japan meeting next week at which policymakers are widely expected to adopt a 2 percent inflation target and perhaps extend the current asset purchase program. Oil prices gained support from the signs of economic strength, which imply strong future demand for oil. They were also lifted by concerns that supplies could be affected by military activity in Algeria and Mali. Brent added 0.9 percent to $110.64 a barrel, and U.S. oil was up 1.4 percent to $95.53.