* Wall Street climbs after upbeat U.S. payrolls report
* Dollar rallies against yen after strong U.S. jobs data
* Bonds retrace earlier losses; investors mull Fed policy
NEW YORK, Dec 6 (Reuters) - Global equity markets surged and the dollar rose against the yen on Friday after stronger-than-expected U.S. jobs data boosted the case for the scaling-back of Federal Reserve stimulus later this month.
The debate over when the Fed will start reducing the flow of cheap money has dominated trading worldwide for months. The main U.S. employment indicator - nonfarm payrolls - bolstered the view that the job market in the world's biggest economy is on the mend.
A total of 203,000 jobs were added last month, the Labor Department said, beating expectations of 180,000, while the unemployment rate dropped three-tenths of a percentage point to a five-year low of 7 percent.
The dollar jumped to session highs against the yen and stocks on Wall Street surged, with the Nasdaq setting a record intraday high for the year.
The dollar index, which tracks the greenback versus a basket of six currencies, rose 0.08 percent to 80.302.
Against the yen, the dollar was last up 0.87 percent at 102.67 yen. The dollar's gains versus the euro were short-lived, as the euro zone common currency was boosted by rising short-term interest rates a day after the European Central Bank dampened hopes for an imminent easing move.
The euro was up 0.1 percent at $1.3682.
While job gains were better than expected, rising incomes stand out as more important, said Tom Porcelli, chief U.S. economist at RBC Capital Markets in New York.
"Wages are strongly driving consumption in this cycle more than any other time. Overall wage gains were the most compelling news in this data," Porcelli said.
Other data also was bullish for stocks. Consumer spending increased 0.3 percent in October, or one-tenth of a percentage point more than expected, after rising 0.2 percent in September.
The Thomson Reuters/University of Michigan's preliminary reading on the overall index on consumer sentiment jumped to 82.5 for December, up from a final reading of 75.1 in November. This was the highest reading for the index since July, and topped analyst forecasts for a reading of 76.
MSCI's all-country world equity index, which tracks shares in 45 nations, rose 0.61 percent, while the pan-European FTSEurofirst 300 index was up 0.57 percent at 1,268.48.
The Dow Jones industrial average rose 112.12 points, or 0.71 percent, to 15,933.63. The S&P 500 gained 12.77 points, or 0.72 percent, to 1,797.8 and the Nasdaq Composite added 11.488 points, or 0.28 percent, to 4,044.653.
U.S. Treasury yields, a benchmark for borrowing costs around the world, briefly climbed above 2.9 percent and later the 10-year note was up 3/32 in price to yield 2.8535 percent.
Bund futures were up 0.14 percent at 140.09 euros.
Gold futures were last up 0.15 percent, at $1,233.8 an ounce.
Brent crude for was last up 0.48 percent, at $111.51 a barrel. U.S. crude was last up 0.2 percent at $97.61.