* Dollar surges 1 pct against yen, also gains versus euro
U.S. stocks edge up after strong payrolls data, Europe slips
* Bond prices slump, yields rise in anticipation of Fed taper
By Herbert Lash
NEW YORK, Nov 8 (Reuters) - An unexpected surge in U.S. jobs growth in October drove Wall Street stocks higher on Friday and in turn boosted the dollar and bond yields by raising expectations the Federal Reserve could scale back its economic stimulus as soon as December.
The jump in new jobs - the Labor Department said employers added 204,000 new jobs last month, well above forecasts of 125,000 - suggested the economy is on strong enough footing for the Fed finally to begin trimming its bond purchases.
The price on 30-year U.S. government debt fell more than two full points, pushing yields up to 3.855 percent from 3.728 percent on Thursday.
"The first part of the equation for the Fed to taper is data showing the economy is getting better," said Eric Kuby, chief investment officer at North Star Investment Management Corp in Chicago.
"If companies are doing well and business is good, you don't need to have zero percent short-term money in order for the stock market to do well," he said.
While the unemployment rate ticked up one-tenth of a percentage point to 7.3 percent, the government report said there was no "discernible" impact on payrolls from the 16-day federal government shutdown last month.
The jobs data and a separate report showing personal income grew 0.5 percent in September should please retailers as it boosts the sales outlook for the holiday season, said Russell Price, senior economist at Ameriprise Financial Services Inc in Troy, Michigan.
Most economists expected businesses to be more cautious during the shutdown than they were, he said. "Clearly what transpired were businesses viewed the shutdown as a temporary phenomenon and that the economy was still growing and would continue to grow going forward," he said.
The Dow Jones industrial average closed up 167.80 points, or 1.08 percent, at 15,761.78. The Standard & Poor's 500 Index rose 23.46 points, or 1.34 percent, to 1,770.61. The Nasdaq Composite Index climbed 61.90 points, or 1.60 percent, to 3,919.23.
For the week, the Dow rose 0.9 percent and the S&P 500 gained 0.5 percent, while the Nasdaq slid 0.1 percent.
U.S. Treasury prices fell on the prospect of Fed tapering, while German Bunds hit two-week lows after the surprisingly strong U.S. jobs gains.
The benchmark 10-year U.S. Treasury note was down 37/32 in price to yield 2.7495 percent. The 30-year U.S. Treasury bond was down 68/32, the yield at 3.849 percent.
The rally on Wall Street helped a measure of global equity markets rebound. MSCI's all-country world index rose 0.35 percent.
But European shares edged lower, with France underperforming after a rating downgrade by Standard & Poor's, which cut the French sovereign rating by one notch.
Still, many investors see increasing signs of a global recovery that will support equities in the longer term.
"We believe 2014 will see an increase in profitability across the region and this should translate into positive performance for European equity investors," said Andrew Arbuthnott, head of large-cap European equities at Pioneer Investments.
The pan-regional FTSEurofirst 300 index of leading European shares fell 0.14 percent to close at 1,295.17.
The Labor Department also revised upward by 60,000 its previous payroll totals for September and August in a report that pointed to a more robust economy going forward.
The dollar rose broadly, reversing a recent trend in which it has fallen on speculation the Fed would not start reducing its $85 billion a month in bond purchases until next year.
A Fed cutback at a time when the European Central Bank and Bank of Japan are in easing mode would boost the dollar's appeal.
The dollar index, which tracks the greenback versus a basket of six currencies, rose 0.47 percent to 81.227.
The euro fell 0.36 percent to $1.3369, having earlier hit a session low of $1.3319, according to Reuters data.
Against the yen, the dollar gained 1.02 percent to 99.08.
Bund futures dropped nearly a percentage point to 140.87 at one point, their lowest since Oct. 25. Bunds settled 81 ticks lower at 141.02.
German 10-year yields rose 7 basis points to 1.76 percent .
Brent oil bounced off a four-month low to trade higher on the U.S. jobs data, while traders kept close watch over a meeting between Western powers and Iran on its nuclear program.
Brent rose $1.66 to settle at $105.12 a barrel. U.S. oil settled up 40 cents at $94.60 a barrel.
U.S. gold futures for December delivery settled down $23.90 at $1,284.60 an ounce.