GLOBAL MARKETS-China's investment denial spurs stock, euro rally

* Euro advances as China affirms FX diversification policy

* China refutes report it's reviewing euro bond holdings

* Bargain-hunting helps global stocks gain traction

By Daniel Bases

NEW YORK, May 27 (Reuters) - Investors drove a broad rally in the euro and pushed U.S. stock indexes up more than 2 percent on Thursday, after China's assertion that Europe will remain a major investment market,

The People's Bank of China said a Financial Times report that Beijing was concerned about its euro-zone bond holdings was groundless. The report had driven the euro to a near four-year low on Wednesday and cut short a rally in U.S. stocks.

Markets charged higher as the perceived risk that China might change the composition of its foreign exchange was reduced.

"Reports from the front suggested that investors might become frightened that China could do something drastic," said Douglas Peta, an independent market strategist in New York. "Getting some assurance that Chinese sales of European sovereign debt isn't imminent is making everyone feel better."

Commodity prices rose as the dollar fell, boosted by improving U.S. oil demand and a drop in crude stockpiles. Gold rose slightly.

European shares closed above the 1,000 mark for the first time in just over a week and U.S. shares rose more than 2 percent. Government debt prices fell as the bid for safety ebbed. Bargain hunters picked through a market that had been beaten down by fears that Europe's debt crisis could spark a credit crunch and undermine the global economic recovery.

"The market is bouncing off oversold, but I think the big catalyst this morning is comments coming out of China that tempered concerns about the Chinese government possibly trimming back its $600 billion plus of euro zone bond holdings," said Fred Dickson, chief market strategist at D.A. Davidson & Co in Lake Oswego, New York.

In midday New York trade, the Dow Jones industrial average .DJI rose 204.05 points, or 2.05 percent, at 10,178.50. The Standard & Poor's 500 Index .SPX gained 24.66 points, or 2.31 percent, at 1,092.61. The Nasdaq Composite Index .IXIC climbed 61.80 points, or 2.81 percent, at 2,257.68.

Equity markets shrugged off a report showing the U.S. economy grew at a slower pace than previously estimated in the first quarter as business investment slackened. [ID:nN27259780]

The pan-European FTSEurofirst 300 index .FTEU3 closed up 2.9 percent at 1,000.46 points. The index remains down around 10 percent from a mid-April peak on worries about Europe's debt crisis.

MSCI's all-country world stock index .MIWD00000PUS rose 2.65 percent.

A Reuters poll out Thursday showed institutional investors held onto their equities exposure more than might have been expected in May, given extreme volatility on financial markets, but also put more money in safe-haven cash. [ID:nLDE64Q0FM]

EURO GAINS

The euro rose 1.67 percent at $1.237 while the dollar fell against a basket of major trading-partner currencies, with the U.S. dollar index .DXY down 1.05 percent at 86.208.

China has been trying to diversify its currency reserves to reduce the dollar's dominance in favor of the euro and yen to curb risks.

On Wednesday the euro collapsed 1.5 percent after the Financial Times reported China's State Administration of Foreign Exchange (SAFE) was meeting foreign bankers because of concerns about its exposure to debt troubles in Europe.

SAFE, the arm of the central bank, manages China's $2.4 trillion in foreign exchange reserves -- the world's largest stockpile.

Separately, the Kuwaiti Investment Authority on Thursday denied a local media report that it, too, was reducing its exposure to euro zone investments. The sovereign wealth fund stated there was no change to its long-term investment strategy including Europe.

In response to the better risk appetite, safe-haven benchmark 10-year U.S. Treasuries traded 1-1/32 lower, driving the yield up to 3.31 percent US10YT=RR.

Euro zone government bond futures settled 39 ticks lower at 128.33, well off the session low of 128.34 FGBLc1.

U.S. light sweet crude oil CLc1 rose $2.90, or 4.06 percent, to $74.41 per barrel, and spot gold prices XAU= rose $1.25, or 0.10 percent, to $1211.10. (Additional reporting by Emelia Sithole-Matarise, Kirsten Donovan, Brian Gorman and Neal Armstrong in London, Lucia Mutikani in Washington, Ryan Vlastelica, Gertrude Chavez-Dreyfuss, Edward Krudy in New York; Editing by Leslie Adler)