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GLOBAL MARKETS-Dollar rally falters, stocks rise with taxes in focus

* S&P 500 sets record closing high; McDonald's boosts Dow

* U.S. economy accelerates in second quarter

* Oil prices drop, back further off recent gains (Updates with close of U.S. markets)

NEW YORK, Sept 28 (Reuters) - The U.S. dollar weakened on Thursday after a recent rally while stocks globally rose modestly as investors digested U.S. economic data and prospects for a U.S. tax reform plan proposed by President Donald Trump.

Trump on Wednesday proposed the biggest U.S. tax overhaul in three decades, calling for tax cuts for most Americans, but prompting criticism that the plan favors business and the rich and could add trillions of dollars to the deficit.

"The market is a little more optimistic that we are going to actually have some kind of tax cuts," said Scott Wren, senior global equity strategist at Wells Fargo Investment Institute in St. Louis, Missouri. "The probability is it is going to take a long time to work it all out."

Bets that the Federal Reserve will raise rates once more by year-end have firmed this week, following comments from Chair Janet Yellen on Tuesday that the U.S. central bank needs to continue gradual rate hikes despite broad uncertainty about the path of inflation.

Data on Thursday showed the U.S. economy expanded a bit faster than previously estimated in the second quarter, but the momentum likely slowed in the third quarter due to the impact of hurricanes Harvey and Irma.

The Dow Jones Industrial Average rose 40.49 points, or 0.18 percent, to 22,381.2, the S&P 500 gained 3.02 points, or 0.12 percent, to 2,510.06 and the Nasdaq Composite added 0.19 point, or 0 percent, to 6,453.45.

The Dow got a boost from McDonald's shares, which rose 2.2 percent after an analyst upgrade.

The S&P 500 set a record closing high as did the small-cap Russell 2000 index and the closely watched Dow Jones Transport Average.

MSCI's gauge of stocks across the globe gained 0.13 percent. The pan-European FTSEurofirst 300 index rose 0.16 percent.

Emerging market stocks lost 0.57 percent, their sixth straight session of declines.

The dollar edged lower against a basket of currencies after a three-day winning streak as investors took profit on the greenback's rally this week ahead of the end of the quarter.

The dollar index fell 0.21 percent, while the euro was up 0.31 percent to $1.1779.

"The market is taking a breather before next week," said Alfonso Esparza, senior currency analyst at Oanda in Toronto.

Next week's nonfarm payroll report is the next big data point that traders are watching for clues to the timing of the next U.S. interest rate hike.

The yield spread between shorter and longer-dated U.S. Treasuries grew after release of a tax plan that raised concerns about faster growth in the federal deficit and borrowing.

Benchmark 10-year notes last fell 1/32 in price to yield 2.3103 percent, from 2.309 percent late on Wednesday.

"Much of the move has been about the tax rollout," said Bruno Braizinha, interest rate strategist at SG Corporate & Investment Banking in New York. "Based on recent history like healthcare reform, it may be a disappointment."

Oil prices slipped, backing off gains spurred by tension around northern Iraq following the Kurdistan region's vote in favor of independence.

U.S. crude fell 1.05 percent to $51.59 per barrel and Brent was last at $57.65, down 0.43 percent.

Spot gold added 0.5 percent to $1,286.51 an ounce.

(Additional reporting by Chuck Mikolajczak, Richard Leong, Saqib Iqbal Ahmed in New York, Marc Jones in London; Editing by Bernadette Baum and Nick Zieminski)