GLOBAL MARKETS-Stocks and bond yields up on hopes of US debt deal
* Wall St indexes rise over 1 pct, European shares also gain
* Dollar extends gains against yen, euro steadies
* Gold extends Wednesday's losses
* Oil higher on kidnapping of Libyan PM
NEW YORK, Oct 10 (Reuters) - Global stock markets and U.S. Treasuries yields surged on Thursday on the first signs of progress towards ending the budget and debt limit deadlock that could cause a historic debt default by the United States.
The dollar initially hit a 2-week high against major currencies before paring gains.
U.S. Treasuries yields rose to their highest in more than two weeks on hopes Congress will reach a deal to raise the debt ceiling before the Oct. 17 deadline, reducing demand for safe-haven Treasuries. The Treasury will sell later in the day $13 billion in new 30-year debt.
House Republican leaders will visit the White House later as efforts intensify to break the impasse that has left parts of the U.S. government shuttered for more than a week.
The dollar was near a three-week high against most major currencies by the middle of the European session as recent U.S. lending market tensions also relaxed.
"It would be a minor sign of hope there may be some more positive news coming in the next couple of days, hard to make much more out of that," said Fred Dickson, chief market strategist, D.A. Davidson & Co in Lake Oswego, Oregon.
"The markets right now are betting somebody will blink between now and October 17."
At 11:00 a.m. EDT (1600 GMT), the Dow Jones industrial average was up 180.91 points, or 1.22 percent, at 14,983.89. The Standard & Poor's 500 Index was up 21.54 points, or 1.30 percent, at 1,677.94. The Nasdaq Composite Index was up 56.78 points, or 1.54 percent, at 3,734.56.
The 45-country MSCI stock index was up 1.2 percent, on track to its strongest showing in 3 months.
European stocks rallied, too, rising 1.8 percent to be on track for their best day in a month. On Wednesday, European equities hit a more than 1-month low.
Both U.S. political parties floated the possibility on Wednesday of a short-term increase in the country's $16.7 trillion debt limit to avoid a default and allow time for broader negotiations.
The U.S. dollar index rose 0.1 percent against a basket of currencies. The euro was flat, recovering from early pressure after French and Italian industrial production data fell short of market expectations.
Against the yen, the dollar rallied 0.8 percent to 98.15 , up from a two-month low of 96.55 yen hit on Tuesday. Traders said the dollar rebounded after finding strong support at its 200-day moving average, currently at 96.82.
The number of Americans filing new claims for unemployment benefits hit a six-month high last week, pressured by the U.S. government shutdown.
Investors expect Republicans and Democrats to cut a deal to raise the debt ceiling before next Thursday's deadline, though each day that passes without an agreement tests their nerves.
U.S. Treasury Secretary Jack Lew said while the standoff in Congress was stressing financial markets, prioritizing government payments just to avoid hitting the debt limit would be irresponsible.
It is unclear how long a short-term deal would be effective for, but any move to raise the borrowing limit would at least stave off a possible default.
"It's a step forward for the market to resume risk-taking, though we are not too optimistic," said Isao Kubo, an equity strategist at Japan's Nissay Asset Management. "Investors are cautiously buying back."
NEAR-TERM FUNDING PRESSURE DOWN
Strains on short-term U.S. interest rates and funding markets have eased after running up in the past two sessions.
The current on-the-run one-month Treasury bill yields traded at 0.18 percent on Thursday, down from 0.29 percent earlier in the day and Tuesday's five-year high of 0.36 percent.
The benchmark 10-year U.S. Treasury note was down 14/32, its yield at 2.7126 percent. Thirty-year bonds dropped 20/32 in price to yield 3.78 percent, the highest since September 20.
There were few signs of nerves on European bond markets, however, with German government bonds, typically favored by risk-sensitive investors, edging lower and higher-yielding euro zone periphery debt faring better.
As the dollar regained its footing, gold eased 0.6 percent, extending Wednesday's 0.9 percent decline.
Oil rose on news Libya's prime minister had been seized by armed gunmen in a Tripoli hotel, although he was later freed.
Brent crude jumped 2.1 percent to $111.38 per barrel and U.S. crude added 1.5 percent to $103.11.