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GLOBAL MARKETS-Stocks rally, U.S. bond yields fall as jobs data fuels rate cut talk

Caroline Valetkevitch

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* Major U.S. stock indexes up more than 1%

* Dollar drops following Labor Department report

* Oil prices rise (Updates with early U.S. markets' activity, changes dateline, previous LONDON)

NEW YORK, June 7 (Reuters) - Major world stock indexes rose and U.S. Treasury yields tumbled on Friday after a slowdown in U.S. job growth fueled hopes of a U.S. interest rate cut, while news the United States would give China more time to avoid a tariff hike added to market optimism.

The U.S. dollar index dropped to its lowest since March 26 after the U.S. Labor Department's monthly report, which also showed wages rose less than expected in May. Yields on 10-year Treasury notes hit their lowest since September 2017.

The jobs data suggested the loss of momentum in economic activity was spreading to the labor market, which could put pressure on the Federal Reserve to cut rates this year.

"This is the type of read the doves will really take to, as it supports the argument for cutting rates beyond politics or trade issues, which were never part of the Fed's mandate to begin with," said Mike Loewengart, vice-president of investment strategy at E*Trade Financial in New York.

Hopes that the Fed would turn more accommodative to blunt the impact of escalating trade tensions have helped support stocks this week and put the S&P 500 on track for its first weekly gain since May 3.

The U.S. government on Friday said it was granting Chinese exporters two more weeks to get their products into the United States before increasing tariffs on those items. But the White House also said its 5% tariff on Mexican imports is still on track to for Monday.

The Dow Jones Industrial Average rose 282.17 points, or 1.1%, to 26,002.83, the S&P 500 gained 32.89 points, or 1.16%, to 2,876.38 and the Nasdaq Composite added 116.60 points, or 1.53%, to 7,732.15.

The pan-European STOXX 600 index rose 1.08% and MSCI's gauge of stocks across the globe gained 1.10%.

Yields on U.S. 10-year Treasury notes were 5.60 basis points lower at 2.067% after touching 2.053% shortly after the May payrolls report, which was their lowest since September 2017.

With trade tensions between the United States and its trading partners still brewing, investors have been assessing how global central banks will respond to signs of a downturn.

Traders now are betting on multiple rate cuts by the Fed over the next 12 months.

But a cut is not guaranteed. And the potential for central banks to disappoint markets was highlighted on Thursday, when the European Central Bank declined to hint it would cut rates soon.

The dollar index fell 0.52%, with the euro up 0.59% to $1.1341.

In the oil market, crude prices gained amid signs that OPEC and other producers could extend their output reduction deal.

U.S. crude rose 1.33% to $53.29 per barrel.

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(Additional reporting by Sruthi Shankar in Bengaluru and Tom Wilson and Helen Reid in London; editing by Larry King and Susan Thomas)