GLOBAL MARKETS-Brighter economic news offsets Greek debt fears

* New York factory data adds to positive sentiment

* Miners, car makers gain on Chinese GDP growth

* Euro gains capped by debt fears

By Richard Hubbard

LONDON, Jan 17 (Reuters) - Improving economic news from China, the U.S. and Germany countered worries over the euro zone debt crisis on Tuesday, increasing risk appetite and lifting global shares and the single currency, but Greek default fears held gains in check.

U.S. stock index futures rose on Tuesday as investors looked to corporate profits with earnings season picking up, and after Citigroup posted an 11 percent fall in quarterly profit.

A gauge of manufacturing in New York State showed growth picked up in January, rising to the highest level in nine months as new orders and employment improved, the New York Federal Reserve said in a report.

Earlier numbers from China showed a much-feared slowdown in the world's second-largest economy was not as great as some had expected but still kept alive hopes for more policy easing measures from the government.

"Investors are happy to look through any longer term worries about Greek debt, and are anticipating some significant policy easing in China after the data released today to boost global activity into the spring of 2012," said Andrew Milligan, head of global strategy at Standard Life Investments.

German investor sentiment also posted its biggest ever monthly improvement in January, helped by recent upbeat data and hopes for the European Central Bank's efforts to ease the region's debt problems.

The improving German ZEW investor sentiment index, while encouraging, still indicated tough times ahead for the euro zone's largest economy, economists said, as it remained in negative territory.

"The (ZEW) index is still consistent with a majority of investors expecting economic conditions to deteriorate in future," Ben May of Capital Economics said.

The brightening economic news gave investors encouragement to move into riskier assets, lifting the euro and causing the U.S. dollar to drop against a range of currencies, including the Australian and New Zealand dollars.

The euro was near its session high of $1.2800, a 1 percent gain on the day, and away from a 17-month low of $1.2624 hit last week.

Sentiment also got a lift from data showing euro zone consumer prices fell more than expected in December, the start of a retreat from a November peak that could give the European Central Bank more room to cut interest rates as the economy heads for recession.

The pan-European FTSEurofirst 300 index of top shares was up 0.8 percent at 1,033.97 points, its highest level since August 2011. Gains were led by car makers and mining companies.

The MSCI world equity index gained by around 0.9 percent after rising in Asian trade on the Chinese data.

DEBT FEARS LINGER

But behind the brighter economic sentiment, worries remain about the prospects of a Greek debt default, which some fear could happen as soon as March when 14.5 billion euros of bond redemptions fall due.

A growing number of experts, including some from ratings agencies, have warned a default was on the cards after Greece's talks with creditors broke down on Friday.

"It is going to happen. Greece is insolvent so it will default," Edward Parker, Managing Director for Fitch's Sovereign and Supranational Group in Europe, the Middle East and Africa told Reuters.

Reflecting concerns over the outlook, European commercial banks parked over half a trillion euros at the ECB, the highest on record, as the mix of debt crisis worries and a recent giant injection of central bank cash left banks awash with money but too scared to lend it.

But a strong response to a Spanish Treasury bill auction on Tuesday eased some debt market concerns ahead of Madrid's auction of bonds with maturities up to 10 years on Thursday.

Despite a two-notch cut in its rating by Standard & Poor's, the Spanish auctions should benefit from support of banks flush with European Central Bank cash and the market's view that the new government is serious about addressing its economic woes.

The ECB tender was a factor in a strong sale last week in which Spain perked up debt markets by selling 10 billion euros of bonds, twice the amount it targeted, at falling yields.

France and Germany also sell bonds later this week.

Commodity prices, mining stocks and commodity-related currencies all gained on hopes of greater economic activity after the Chinese GDP figures.

As the world's second-largest oil consumer, China's stronger-than-expected economic growth lifted Brent crude futures 77 cents at $112.11 a barrel, for a second day of gains.

Gold climbed to its highest in five weeks, rising 1.1 percent at $1,662.40 an ounce, while U.S. gold futures for February delivery were up $32.20 an ounce at $1,663.00.