* World stocks .MIWD00000PUS hit 5-week highs
* Equities rally on U.S. govt plan on toxic assets
* Dlr consolidates on improved sentiment towards US assets
By Atul Prakash
LONDON, March 24 (Reuters) - World stocks hit five-week highs on Tuesday on growing optimism that a U.S. plan to purge toxic assets from the balance sheet of banks could ease the misery of the financial sector.
Appetite for riskier assets also grew after data showed on Monday a surprise rise in U.S. home sales, reviving hopes that the battered housing market could be on a recovery path.
The dollar's trade-weighted value consolidated, halting its fall last week triggered by the Federal Reserve's announcement that its balance sheet expansion of over $1 trillion would include purchases of government debt.
The dollar held its ground against a basket of currencies as the euro slipped on expectations of an interest rate cut next week and the global equity market rally hit the yen.
The U.S. government on Monday offered a raft of incentives for private investors to help rid banks of up to $1 trillion in toxic assets that plunged the world economy into crisis.
The plan is the latest step in a series of aggressive actions to restore credit flows and combat a virulent recession. Less than a week ago, the Fed ramped up its efforts, vowing to pump an additional $1.15 trillion into the economy.
The MSCI World index .MIWD00000PUS, a gauge of global stocks performance, was 0.6 percent higher after rising to its highest level since mid-February. The index has risen for 10 out of the last 11 days. The MSCI stock index for emerging markets .MSCIEF also climbed 5.09 percent.
"If this positive momentum can be sustained, and there are further signs that the credit markets are loosening, we could see money that had previously sat on the sidelines re-entering the markets," said Chris Hossain, senior sales manager at ODL Securities.
The FTSEurofirst 300 index .FTEU3 of top European shares rose for a fourth consecutive day and was up 0.3 percent, tracking a 7 percent jump on Wall Street and more than 3 percent rise in Japanese shares .N225.
Key gauges of services and manufacturing activity also suggested the economic contraction gripping the euro zone eased a little in March, against expectations, but firms continued to slash jobs and prices. [ID:nLO266802]
Markit said its Flash Eurozone Purchasing Managers Index for the dominant service sector rose to 40.1 in March, still well below the 50 mark where growth begins but ahead of February's 39.2 and considerably above expectations for 39.0.
END OF BEAR MARKET?
But analysts said they wanted to see more evidence before declaring the market has seen its trough. The FTSEurofirst is still down 11 percent this year after plunging 45 percent in 2008 on a crisis that began with U.S. mortgage defaults in 2007 and has pushed much of the world into a deep recession.
"Everyone seems very upbeat and people are calling the end of the bear market, but we haven't reached the bottom of the economic cycle -- there's at least three months of painful stuff to come," said David Buik, senior strategist at BGC Partners.
In the currency market, the dollar consolidation and profit taking on the euro showed currency traders trimming some of the bets built up in recent sessions as they waited to see if equities could extend their sharp gains from the last session.
The dollar index .DXY, a gauge of its performance against a basket of major currencies, was flat at 83.470.
The euro backed down from the peaks hit in the wake of the Fed's announcement last week, after European Central Bank President Jean-Claude Trichet again said interest rates could be cut to help kickstart the economy.
European credit derivative indexes rallied for a second day, after stocks rose sharply. The investment-grade Markit iTraxx Europe index ITEEU5Y=GF was at 154 basis points, according to data from Markit, 9 basis points tighter versus late Monday.
Euro zone government bond yields marked a five-day high EU10YT=RR, while U.S. Treasuries TYv1 slipped as stocks extended their rally and dealers braced for this week's slew of nearly $100 billion of U.S. bond supply which opens with $40 billion of two-year T-Notes on Tuesday. (Additional reporting by Simon Falush; editing by Stephen Nisbet)