* Wall Street rallies, S&P 500 hits highest since April
* Germany's Merkel remarks raised hopes on ECB aid
* Cisco's results boost stocks, Wal-Mart, Facebook weigh
* Dollar turns negative after jobless, housing data
* Benchmark U.S. yields rise near 200-day moving average
NEW YORK, Aug 16 (Reuters) - World shares rose to near 3-1/2-month highs o n T hursday after supportive comments from Germany on the European Central Bank's efforts to contain the region's debt crisis, while disappointing U.S. data weakened the dollar.
Investors were heartened by comments from German Chancellor Angela Merkel, who said ECB President Mario Draghi's declarations last month to do whatever was necessary to save the euro were "completely in line" with the approach taken by European leaders. Draghi was criticized within Germany in the wake of those comments.
Merkel's remarks raised the prospect the European Central Bank might soon buy the sovereign debt of Spain, Italy and other debt-laden euro zone members whose high borrowing costs could become crippling. Her comments sent 10-year Spanish bond yields to a one-month low of 6.55 percent.
"Anything from the German quarter that expresses some support is very positive for stocks, peripheral debt and other risky assets. That means the ECB would not be thwarted with its efforts," said Robert Tipp, chief investment strategist at Prudential Fixed Income in Newark, New Jersey.
On the economic front, a small, unexpected rise in U.S. jobless claims and a surprise drop in housing starts renewed expectations the Federal Reserve would engage in a third round of large-scale bond purchases, dubbed QE3, to help the sluggish economy. That initially spurred investor appetite for safe-haven U.S. and German government bonds.
A report from the Philadelphia Federal Reserve also signaled business contraction in the U.S. mid-Atlantic region in August, though it was milder than in July.
The initial rebound in Treasuries and Bunds markets faded with benchmark U.S. yields approaching their 200-day moving average, a bearish market signal.
Other markets held in recent ranges as traders await possible action from U.S., European and Chinese central bankers.
"We are still pricing in QE3," said Ellis Phifer, senior market analyst at Raymond James in Memphis, Tennessee. "If the numbers are bad, stimulus will be closer."
Oil prices flirted with their highest levels since early May on worries about possible supply disruption from tension in the Middle East and a sharp drop in U.S. inventories.
Gold prices hovered above $1,600 an ounce on hopes of central bank stimulus, but somewhat encouraging U.S. economic data pared expectations any such moves might happen soon.
On Wall Street, the Standard & Poor's 500 index managed to hold above 1,400, close to a four-year high. Analysts said stocks will likely stay around current levels through options expiration on Friday.
The Dow Jones industrial average closed up 85.33 points, or 0.65 percent, at 13,250.11. The S&P 500 ended up 9.98 points, or 0.71 percent, at 1,415.51. The Nasdaq Composite Index finished up 31.46 points, or 1.04 percent, at 3,062.39.
CISCO LEADS CHARGE
Among key stock movers, Cisco Systems rose 9.6 percent to $19.02 a share after the world's largest network equipment maker reported better-than-expected results and raised its dividend.
"Cisco shed some light on the future. It shows a bit more optimism," said Lawrence Creatura, co-portfolio manager of the Federated Clover Small Value Fund in Rochester, New York.
Developments at several top U.S. companies, however, kept a lid on gains.
Wal-Mart Stores, the world's No. 1 retailer, said its full-year results may miss Wall Street expectations as growth slows in international markets. Its stock fell 3.1 percent to $72.15.
Shares of Facebook, the world's biggest Internet social network, lost 6 percent as a lockup period that prevented some insider sales came to an end. They last traded at $19.87, slightly more than half the $38 IPO price.
Still, the overall U.S. stock market showed resilience, lifting the global MSCI index by 0.76 percent to 325.18, a level last seen on May 4.
Top European shares erased early losses, closing up 0.33 percent at 1,104.37.
In the currency market, the dollar turned lower against most major currencies after the latest data on U.S. jobless claims and home construction. The dollar index was 0.32 percent lower at 82.38.
Merkel's remarks stemmed the euro's recent slide against the greenback, boosting it 0.57 percent to $1.2358.
The accelerated gains in stocks and the euro came at the expense of bonds.
Benchmark 10-year Treasury notes were down 6/32 in price, yielding 1.838 percent, just shy of a three-month high of 1.862 percent hit earlier, according to Reuters data. The 10-year yield came within a basis point of its 200-day moving average. If the 200-day average were breached, the 10-year yield could test support in the 2 percent area, analysts said.
German Bund futures rose 21 basis points to 141.62 after hitting their lowest level since July 2.
In commodity trading, Brent crude futures for September delivery expired up 65 cents or 0.56 percent at $116.90 a barrel, while U.S. oil futures settled $1.27 or 1.35 percent higher at $95.60 a barrel.
Gold rose for a second day, posting its biggest rise in almost two weeks on bets for more central bank stimulus. It last traded up 0.7 percent at $1,614.10 an ounce.