* Euro rises against the dollar on Fed hopes
* U.S., world stocks jump 1 pct
* Brent crude up after touching 17-month lows (Updates prices, adds details)
By Caroline Valetkevitch
NEW YORK, June 19 (Reuters) - World stocks rose more than 1 percent and the euro gained on Tuesday amid optimism the world’s major central banks will provide more economic stimulus as the euro zone crisis worsens.
The U.S. Federal Reserve on Tuesday begins a two-day policy-setting meeting with investors focused on whether it will unveil any more stimulus to support the lackluster recovery.
Analysts expect the Fed to extend its long-term bond-buying through “Operation Twist” by a few months from the current deadline of June. Expectations of further stimulus from the Fed pressured the U.S. dollar across the board.
Investors have been worried about the impact of the euro zone crisis on the global economy, particularly as the U.S. economy appears to be losing momentum.
U.S. stocks rose more than 1 percent, while world stocks, as measured by the MSCI’s all-country world equity index climbed 1.2 percent.
The euro gained 0.5 percent on the day at $1.2640 after hitting session highs of $1.2647.
“People are anticipating some type of response from the Fed tomorrow and are buying or covering shorts in anticipation of that,” said Paul Zemsky, head of asset allocation at ING Investment Management in New York.
A surprise fall in British inflation strengthened the chance of steps from the Bank of England to support the UK economy as it feels the heat of the euro zone’s problems.
Growth-related stocks led Wall Street’s rally, with the S&P materials sector up 1.7 percent and the financial sector up 1.5 percent. U.S. Steel Corp jumped 5.4 percent to $19.41 and Bank of America added 4.8 percent to $8.13.
The Dow Jones industrial average was up 120.18 points, or 0.94 percent, at 12,862.00. The Standard & Poor’s 500 Index was up 13.99 points, or 1.04 percent, at 1,358.77. The Nasdaq Composite Index was up 34.32 points, or 1.19 percent, at 2,929.65.
The pan-European FTSEurofirst 300 added 1.6 percent while Spain’s IBEX rose 2.7 percent.
At the same time, concern mounted over a sharp rise in Spain’s short-term borrowing costs, a big fall in German investor confidence and Greece’s commitment to its bailout plan.
Spain came closer to becoming the largest euro zone country yet to be shut out of credit markets when it had to pay a euro era record price to sell short-term debt.
The euro zone’s fourth largest economy, Spain had to pay 5.07 percent to sell 12-month Treasury bills and 5.11 percent to sell 18-month paper - an increase of about 200 basis points on the last auction for the same maturities a month ago. Yields on longer-term bonds are over 7 percent.
On Monday, initial enthusiasm over a weekend victory for pro-bailout parties in Greek elections gave way to worry about the nagging debt crisis still facing the euro zone.
In the oil market, Brent crude rebounded from near a 17-month low.
Brent crude futures were up 48 cents at $96.53 a barrel, while U.S. crude was up 76 cents at $84.03.
U.S. Treasury prices fell as some investors closed out profitable positions before the start of the Fed meeting.
U.S. benchmark 10-year notes were last down 12/32 in price to yield 1.61 percent, up from 1.57 percent late on Monday.
Gold prices eased in choppy trading. (Reporting by Caroline Valetkevitch, additional reporting by Richard Hubbard in London and Gertrude Chavez-Dreyfuss in New York; Editing by Theodore d’Afflisio)