* U.S. housing data also help U.S. stocks
* MSCI World index off 0.5 pct on Italy's vote concern
* Oil prices drop on Italian uncertainty and worries about demand
NEW YORK, Feb 26 (Reuters) - U.S. stocks jumped on Tuesday after Federal Reserve Chairman Ben Bernanke reassured investors about the continuation of stimulus measures, bucking a downward trend in global equities and oil prices on the uncertainty created by Italy's election.
A closely watched gauge of European stock market volatility hit a 2013 high after the muddy election outcome in Italy raised fresh concern about the outlook for the euro zone's debt crisis.
Investors are fearful that the strength of the vote for anti-austerity parties will weaken efforts to reform Italy's public finances and its labor laws, damaging the euro zone's efforts to resolve its three-year old debt crisis.
Markets across Europe fell on the vote results, with Italy's FTSE MIB among the hardest hit, tumbling 4.9 percent.
"This should remind us the crisis has only been in remission," said Bruce McCain, chief investment strategist at Key Private Bank in Cleveland, Ohio.
However, U.S. stocks climbed as Bernanke strongly defended the Fed's bond-buying stimulus, easing worries that monetary policymakers might be getting cold feet about continuing the extraordinary measures to support the economy. Data showing sales of new homes hit a 4 1/2-year high added to bullish sentiment.
Bernanke "certainly said everything the market needed to feel in order to get comfortable again," said Peter Kenny, managing director at Knight Capital in Jersey City, New Jersey.
On Wall Street, the Dow Jones industrial average shot up 115.96 points, or 0.84 percent, to close at 13,900.13. The Standard & Poor's 500 Index gained 9.09 points, or 0.61 percent, to 1,496.94. The Nasdaq Composite Index advanced 13.40 points, or 0.43 percent, to close at 3,129.65.
The MSCI world equity index slipped 0.5 percent, while the pan-European FTSEurofirst 300 index ended down 1.4 percent.
The election uncertainty led to a sharp rise in volatility, with Europe's VSTOXX index, which reflects demand for protection against a drop in major European equities, hitting a new year's high on Tuesday at 24.73.
Southern European government bond prices sank. Italy's 10-year bond yields rose as much as half a point to 4.86 percent, their highest since mid-December.
The Italian elections also weighed on oil prices, with Brent crude oil futures falling $1.73, or 1.51 percent, to settle at $112.71 a barrel. U.S. crude oil fell 48 cents, or 0.52 percent, to settle at $92.63.
In the foreign exchange market, the euro traded flat against the U.S. dollar and yen, recouping earlier losses with the help of the Fed assurances on stimulus.
The euro last traded at $1.3058, down 0.02 percent on the day. During early London trade, the euro touched $1.3017, its weakest showing since Jan. 7.
Against the yen, the euro finished the day in the 120.20-yen area, up 0.27 percent.
The dollar last traded at 91.89 yen, up 0.10 percent for the day.
U.S. BONDS SLIP
U.S. Treasuries prices fell, though yields held near their lowest levels in a month following Bernanke's comments and as political instability in Italy boosted demand for lower-risk assets.
The benchmark 10-year U.S. Treasury note fell 6/32 in price, with the yield at 1.89 percent.
U.S. financial markets were rattled last week when minutes of the Fed's January meeting showed some officials were thinking of scaling back the central bank's monetary stimulus earlier than expected.
In his testimony, Bernanke also urged lawmakers to avoid sharp spending cuts set to start taking effect on Friday.
"Bernanke's commentary showed the Fed chairman wants to continue quantitative easing (i.e. bond purchases) and keep its general stance of monetary policy accommodation," said Eric Stein, vice president and portfolio manager at Boston-based Eaton Vance Investment Managers.
The Fed is currently buying $85 billion in bonds each month, and has said it plans to keep purchasing assets until it sees a substantial improvement in the outlook for the labor market.
Bernanke's remarks also boosted gold prices. Spot gold gained 1.3 percent to $1,615.16 an ounce, its biggest one-day advance since Nov. 23, 2012.
Among data having the biggest influence on markets, U.S. Commerce Department data showed sales of new homes jumped 15.6 percent to a 4 1/2-year high in January. The percentage increase was the largest in almost 20 years.
A separate report showed U.S. consumer confidence rose more than expected this month as Americans shrugged off worries about fiscal policy.