GLOBAL MARKETS-World stocks jump on low rate outlook, oil gains

* Dow, S&P 500 surge to 17-month closing highs

* Dollar slips after Fed renews low interest rate pledge

* Oil tops $82 as OPEC leaves output targets unchanged

* Long-dated Treasuries rise as U.S. producer prices fall (Updates with close of U.S. markets)

By Herbert Lash

NEW YORK, March 17 (Reuters) - U.S. and European stocks hit 17-month closing highs and commodity prices jumped on Wednesday after a drop in a gauge of U.S. inflation added weight to a Federal Reserve pledge to keep interest rates low for a long time, boosting risk appetite.

The Dow industrials and S&P 500 surged for a seventh straight session, and along with a major pan-European stock index, closed at their highest levels since October 2008.

Commitments by both the Fed and the Bank of Japan to low rates instilled confidence in investors to lower their aversion to risk, leading the yen to weaken and the U.S. dollar to fall against high-yield currencies such as the Australian dollar.

Investor enthusiasm mounted after the Fed on Tuesday reiterated plans to leave rates ultra-low for an extended period. Low rates should stimulate growth and boost demand.

"The general belief now is we are emerging from recession and that there are brighter days ahead," said Michael Gross, futures analyst with Optionsellers.com in Tampa, Florida.

The Dow Jones industrial average .DJI closed up 47.69 points, or 0.45 percent, at 10,733.67. The Standard & Poor's 500 Index .SPX gained 6.75 points, or 0.58 percent, at 1,166.21. The Nasdaq Composite Index .IXIC climbed 11.08 points, or 0.47 percent, at 2,389.09.

The Dow's gains on Wednesday marked a seven-session winning streak that was the longest since an eight-day run in August 2009, when it rose 4.9 percent. In the last seven sessions, the Dow has gained 1.7 percent.

The U.S. Labor Department said the index for prices paid at the farm and factory gate fell 0.6 percent last month, the largest decline since July, after a 1.4 percent increase in January. The drop, led by tumbling energy costs, reinforced views that inflation is benign and the Fed will not boost interest rates any time soon.

"Investors like knowing where rates are going to be for at least the next three months," said Marc Pado, U.S. market strategist at Cantor Fitzgerald & Co in San Francisco. "Knowing we have that stable environment to look forward to is what's lifting stocks."

The Chicago Board Options Exchange volatility index, a gauge of investor sentiment better known as the Vix .VIX, fell 4.4 percent to lows last seen in May 2008. The Vix, a 30-day risk forecast, typically moves inversely to the S&P 500 stock index. A lower reading suggests there is a greater desire in the markets to take risk.

A similar European gauge, the VDAX-NEW volatility index .V1XI, fell 2.2 percent.

MSCI's all-country world stock index .MIWD00000PUS rose almost 0.9 percent. The pan-European FTSEurofirst 300 .FTEU3 index of regional shares rose 0.9 percent to end at 1,070.90 points.[ID:nLDE62G1CJ]

Despite the new highs in a stock rally from decade lows a year ago, some investors remained cautious as the recovery from the deepest global recession since World War Two remains weak.

"Governments and central banks have put massive fiscal and monetary stimulus into the system. The big question for this year is what happens when they withdraw it," said Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets in Brussels.

"This rally, which we still consider to be a bear market rally, has gone quite a bit further than we thought," he said.

Oil rose 1.5 percent toward $83 a barrel after a U.S. government report showed increased oil product demand and as the Organization of Petroleum Exporting Countries decided to leave output targets unchanged. [ID:nSGE62G0AG]

A weaker dollar also provided support for oil and other commodities.

U.S. crude for April delivery CLc1 gained $1.23 to settle at $82.93 a barrel. London Brent crude LCOc1 rose $1.43 to settle at $81.96.

The euro fell from five-week highs against the dollar as sentiment remained negative on the euro zone single currency despite pronouncements of support by European Union members for debt-strapped Greece.

The euro EUR= was down 0.22 percent at $1.3739. The dollar was down against major currencies, with the U.S. Dollar Index .DXY off 0.04 percent at 79.719.

Against the yen, the dollar JPY= was unchanged at 90.27.

Longer-dated U.S. Treasuries rose as the drop in producer prices was taken by investors as further evidence the Fed will not raise rock-bottom interest rates any time soon.

Prices gains were limited, however, as higher stocks eroded the safe-haven appeal of lower-risk government debt.

Benchmark 10-year Treasury notes US10YT=RR traded 4/32 higher in price to yield 3.64 percent.

Gold prices retreated from earlier gains.

Spot gold prices XAU= fell $5.10 at $1,119.60 an ounce.

Earlier, Japan's Nikkei .N225 closed up 1.17 percent, boosted by the BoJ's decision to loosen monetary policy. (Reporting by Ryan Vlastelica, Gertrude Chavez-Dreyfuss and Richard Leong in New York; David Sheppard and Brian Gorman in London; Writing by Herbert Lash; Editing by Leslie Adler)