GLOBAL MARKETS-Euro hits 6-week high, fiscal cliff worries Wall St
* Euro returns to 6-week high on Greece optimism
* "Fiscal cliff" uncertainty limits U.S. stock gains
* Treasuries tread water, commodities struggle on world growth worries
NEW YORK/LONDON, Dec 4 (Reuters) - The euro hit a six-week high on Tuesday as Greece's plan to buy back debt cheered investors, though worries about Washington's ability to avoid a year-end budget crisis kept U.S. stocks in check.
Markets fear the U.S. economy will slip into recession if $600 billion of tax hikes and spending cuts are allowed to take effect in January. The White House and Congress have yet to agree on a long-term deficit reduction plan.
Commodities also struggled as weak manufacturing data and the U.S. budget talks fanned concerns about the health of the global economy.
European shares and the euro, however, rose on Greece's buy-back plan and encouraging news from Portugal and Spain, adding to hopes that the euro zone was finally getting a handle on a multi-year debt crisis. The euro extended its recent rally, hitting a six-week high above $1.31.
"Greece is on track with its debt buy back, Spain came out and said it would take the 40 billion for its banks, and Portugal will get its next round of funding," said Heinz-Gerd Sonnenschein, equities strategist at Postbank in Germany.
Greece's buyback is a crucial part of a deal reached last week by international lenders to cut the country's debt pile, and needs to be completed before the IMF can release its emergency aid.
"So with it looking like Europe is on track, it is now over to the U.S. (to find a fiscal cliff deal)," Sonnenschein said.
Worries about U.S. lawmakers' inability to compromise on fiscal issues sapped earlier gains in European shares, with the FTSEurofirst 300 index retreating from a 17-month peak.
U.S. indexes were mixed, with the Dow Jones industrial average rising 35.88 points, or 0.28 percent, at 13,001.48. The Standard & Poor's 500 Index was up 2.09 points, or 0.15 percent, at 1,411.55. The Nasdaq Composite Index was down 2.70 points, or 0.09 percent, at 2,999.50.
Headlnes about the back-and-forth proposals by Republicans and Democrats have monopolized attention on Wall Street, though many investors still expect a deal before the year-end deadline, which could trigger a rally.
"Support (for the market) is based on a belief that Washington will come to some agreement before we go over the fiscal cliff," said Art Hogan, managing director of Lazard Capital Markets in New York. "On the first show of flexibility from either side, we'll get a relief rally."
U.S. government bond prices were little changed as most investors kept to the sidelines in the absence of progress on budget negotiations. The benchmark 10-year Treasury was up 1/32 to yield 1.62 percent.
"When things are drifting like this, we see some money gravitating to investment-grade corporate bonds," said Jim Vogel, interest rate strategist with FTN Financial in Memphis, Tennessee.
With the euro zone mood lifting, Spanish, Italian and Greek bonds rose while German Bunds stayed on the back foot, though losses were limited by the potential impasse in budget talks.
Italian 10-year yields fell 5 basis points to 4.40 percent, while the Spanish equivalent was 3 ticks down at 5.24 percent, extending Monday's falls after Greece unveiled better-than-expected terms for the debt buyback.
Lingering worries about the world economy, though, pushed oil and gold lower, while copper was little changed. U.S. crude oil dipped 78 cents to $88.31 a barrel, and gold fell about 1 percent to its lowest in nearly a month after prices broke below key support levels.
Data this week showed the U.S. manufacturing sector contracted in November, its worst month in more than three years, and that raised worries about demand for energy.
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