(Adds fresh prices)
* U.S. stocks advance as data feeds momentum
* ECB cash injection lifts sentiment in Europe, boosts banks
* U.S. data, while tepid, offers fresh encouragement
By Herbert Lash
NEW YORK, March 1 (Reuters) - U.S. and European stocks rose on Thursday as investors focused on encouraging U.S. economic data and the European Central Bank's massive injection of cash boosted banks, while crude oil gained on an upbeat outlook for the global economy and worries over supply disruptions related to Iran.
U.S. stocks pared gains after data that showed growth in U.S. manufacturing unexpectedly cooled in February and consumer spending was flat in January for the third straight month after accounting for inflation.
But major U.S. automakers posted stronger auto sales in February, helped by the need to replace aging cars and trucks despite rising fuel prices. In addition, many retail chains reported stronger-than-expected gains in same-store sales last month.
After gaining more than 9 percent in January and February, the benchmark S&P 500 started off March on an up note as investors focused on data that supported a strong economic outlook.
The day's rise "is purely a momentum move, and when you have positive momentum in place, investors will ignore numbers that don't fit in with the theme," said Steve Sosnick, equity risk manager at Timber Hill/Interactive Brokers Group in Greenwich, Connecticut.
The Dow Jones industrial average was up 31.71 points, or 0.24 percent, at 12,983.78. The Standard & Poor's 500 Index was up 5.56 points, or 0.41 percent, at 1,371.24. The Nasdaq Composite Index was up 13.08 points, or 0.44 percent, at 2,979.97.
Despite the recent strong gains on Wall Street, much of the rally is considered vulnerable and built on light volume. The Dow is struggling to hold the 13,000 mark, a level it touched earlier this week for the first time since May 2008.
European stocks rose almost 1 percent, led by bank shares benefiting from the ECB's latest liquidity boost. A dip in Spanish borrowing costs fueled hopes the worst of the euro zone crisis is over.
The FTSEurofirst 300 index of top European shares rose provisionally ended 1 percent higher at 1,086.04 points, hitting levels not seen since Feb. 22.
"The funding risk in the banking system has reduced substantially," Dennis Jose, strategist at Barclays Capital, said. "The risk the sovereign having to eventually bail out the banks has also reduced" with the ECB's liquidity measure.
But gains were limited as key benchmark indexes in Europe and on Wall Street failed to convincingly break above major resistance levels as a brisk 2-1/2-month rally loses steam.
The euro recovered to trade little changed against the dollar on hopes that Federal Reserve Chairman Ben Bernanke might scale back on the comments he made on Wednesday in testimony to Congress.
Bernanke's prepared remarks on Thursday were a repeat of the prior day's testimony, as he stopped short of signaling a further easing of monetary policy.
The euro was down slightly at $1.3318.
The euro had been weak before New York opened after the ECB's huge cash injection reminded investors of the region's debt overhang and the fragile euro zone economy.
The ECB's move had a big effect on the euro zone debt market with Italian government bond yields now closer to safe haven German government debt than they have been since September last year.
The 10-year benchmark Italian government bond yield was around 5.0 percent, having dipped under that level briefly, while the two-year bond fell below 2 percent for the first time since November 2010.
U.S. Treasuries prices briefly pared early losses after the Institute for Supply Management said its index of U.S. factory activity fell to 52.4 from 54.1 the month before. The reading was shy of expectations of 54.5, according to a Reuters poll of economists. A reading above the 50 mark indicates expansion.
Benchmark 10-year notes were off 25/32 in price to yield 2.06 percent.
Oil rose above $123 a barrel as Chinese and U.S. data bolstered the demand outlook and concern persisted about a supply disruption from Iran.
A Chinese government survey showed factories' output grew more than expected in February.
Brent crude rose $1.50 to $124.16 a barrel. U.S. oil was up 37 cents to $107.44. (Reporting By Herbert Lash; Additional reporting by Ellen Freilich; Editing by Chizu Nomiyama and Leslie Adler)