Global stocks hit fresh highs, caution grows

NEW YORK (Reuters) - Major stock markets rose to over 2-1/2-year highs on Friday as upbeat corporate earnings offset China's latest tightening move and oil prices steadied after rising on Middle East political tensions.

U.S. stock indexes ended up for a third week of gains, though weak volume could be a signal of a tired run. The MSCI all-country world stock index .MIWD00000PUS rose 0.3 percent to 347.83, after hitting its highest since late July, 2008.

Robust earnings and merger activity have fueled a rally in developed stock markets in recent months. Analysts said the risk of a pullback is growing, with technicals pointing to signs of overbought conditions. The market has defied those expectations for weeks.

"I've never seen a market like this," said Paul Mendelsohn, chief investment strategist at Windham Financial Services. A market watcher for 35 years, he is taking profits in every area but commodities.

"No matter where we start out in the morning, buyers come in," he said. "I'm showing by every technical and quantitative standard I have, this market is at extreme levels."

The Dow Jones industrial average .DJI ended up 73.11 points, or 0.59 percent, at 12,391.25. The Standard & Poor's 500 Index .SPX was up 2.58 points, or 0.19 percent, at 1,343.01. The Nasdaq Composite Index .IXIC was up 2.37 points, or 0.08 percent, at 2,833.95.

Caterpillar Inc (CAT.N) rose 2.4 percent to $105.86 after the equipment maker said machinery sales through dealers accelerated in the three months through January.

"There is definitely high anxiety because everyday it looks like the market is at the top and it's going to have to correct," said James Dailey, portfolio manager of TEAM Asset Strategy Funds in Harrisburg, Pennsylvania.

The CBOE Volatility Index VIX .VIX, Wall Street's so-called "fear gauge", rose 4.7 percent on the week. The index is usually inversely correlated to the S&P and a rise in the VIX typically means a drop in the stock market.

OIL IN FOCUS

World equities briefly came under pressure after China raised banks' required reserves half a percentage point to 19.5 percent for the biggest banks, the second such increase this year as government continues the fight against inflation.

European shares .FTEU3 ended near 29-month highs, with miners hit after China's tightening move.

In Paris, China rejected plans to use real exchange rates and currency reserves to measures global economic imbalances, casting doubt on the ability of Group of 20 major economic powers to reach agreement at a meeting on Friday.

Crude oil prices earlier jumped after Egypt approved the passage of two Iranian warships through the Suez Canal. Israel has called Iran's plans to send navy ships through the Suez Canal a "provocation".

U.S. March light crude futures rose to a high of 87.88 a barrel before ending down 16 cents. Brent crude futures gained hit above $103 a barrel in volatile trading before easing back.

Spreading unrest in the Middle East and North Africa also stoked fears of potential disruption to oil flows and pushed up prices.

The safe-haven gold rose to a five-week high at $1,392.60 an ounce.

The euro rose above $1.37 after a senior European Central Bank official was quoted in a media report as saying that the central bank may have to raise interest rates as global inflation pressure mounted.

(Additional reporting by Caroline Valetkevitch and Julie Haviv in New York; Editing by Andrew Hay)