* U.S. S&P stock index highest intraday since Oct. 2007
* European shares dip after Italian credit downgrade
* Wall Street's "fear gauge" falls to lowest since 2007
* U.S. oil prices rebound after losses on Chinese data
* Dollar near 3-1/2-year high vs yen on U.S. jobs growth
NEW YORK, March 11 (Reuters) - Wall Street stocks edged up on Monday, approaching a 5-1/2-year high, on optimism about the U.S. economy and easy monetary policy from the Federal Reserve, while U.S. oil prices rebounded after falling due to disappointing Chinese industrial data.
Fitch Ratings' cut in Italy's credit rating late on Friday spurred some selling in European shares and Italian government bonds while supporting safe-haven bids for gold, U.S. and German government debt and other perceived lower-risk assets.
The dollar clung to gains from the payrolls data, trading near a 3-1/2-year high against the yen and a 3-month peak versus the euro.
The benchmark Standard & Poor's 500 stock index was on track to extend its winning streak to seven sessions and touched its highest intraday level since Oct. 15, 2007. Wall Street overcame early losses on worries about China and Italy.
Friday's surprisingly strong U.S. jobs report, along with encouraging data on the housing market, reinforced the appetite for stocks and views of the market posting further gains with help from the Fed.
"There's real belief in this rally," said Tim Ghriskey, chief investment officer of Solaris Group in Bedford Hills, New York. "There are lots of investors out there looking for opportunities to put more money to work in equities, and they're using these little pullbacks we've had - and there haven't been many - as purchasing opportunities."
Nonetheless, a closely watched fear indicator was in rapid retreat.
Wall Street's "fear gauge," the CBOE Volatility Index, also known as the VIX, fell to the lowest level since April 2007, shedding 5.5 percent to 11.90.
The resilience on Wall Street and a 0.53 percent gain in Tokyo shares helped MSCI's world equity index to rise 0.37 percent to 361.42, near its mid-2008 highs.
In midafternoon trading, the Dow Jones industrial average was up 36.06 points, or 0.25 percent, at 14,433.13. The Standard & Poor's 500 Index was up 4.16 points, or 0.27 percent, at 1,555.34. The Nasdaq Composite Index was up 5.82 points, or 0.18 percent, at 3,250.18.
Europe's broad FTSEurofirst 300 index closed off 0.05 percent at 1,194.64, down from September 2008 peaks hit last week, as the Italy rating cut and weak Chinese factory output data undermined sentiment.
China reported over the weekend that annual industrial production for January and February combined rose 9.9 percent, the lowest since October 2012, while its consumer price index jumped more than expected last month.
Fitch on Friday cut Italy's debt to BBB-plus from A-minus and gave the rating a negative outlook, raising the risk its next ratings change will be a further downgrade.
Anxiety over further deterioration in the euro zone's third-biggest economy pushed 10-year Italian government bond yields up 7 basis points to 4.66 percent.
"I think the Italian downgrade is acting as a bit of a wake-up call," said Alastair Winter, chief economist at investment bank Daniel Stewart & Co in London.
The benchmark 10-year U.S. Treasury note traded in a narrow range and was last down 3/32 in price with a 2.0504 percent yield.
Safe-haven gold posted modest gains, last up 0.2 percent at $1,580.11 an ounce. Gold bullion was seen staying within a range of $1,560 to $1,590.
OIL FALLS, DOLLAR FIRM
In addition to Italy's downgrade, the slower-than-expected growth in Chinese factory output briefly crimped investor sentiment on oil, copper and other raw materials.
U.S. oil futures settled up 11 cents or 0.12 percent at $92.06 a barrel, erasing an early loss of more than $1.
But Brent crude fell 73 cents or 0.66 percent to $110.12 a barrel, after ending last week marginally higher to snap three straight weekly losses.
Three-month copper on the London Metal Exchange closed at $7,755 a tonne, up from a previous close of $7,740, having earlier hit a one-week low of $7,667 a tonne.
In the foreign exchange markets, the dollar added to gains it made against most major currencies after Friday's strong payrolls data boosted hopes of a steady U.S. economic recovery this year.
The data has also fueled speculation the U.S. Federal Reserve could back off from its ultra-loose monetary policy sooner than anticipated, and this added to the currency's appeal as traders speculated about looser policies by other major central banks ahead.
The dollar dipped 0.1 percent at 82.59 against a basket of major currencies, not far from the seven-month high of 82.92 hit on Friday. The currency has risen nearly 5 percent since early February.
The euro was flat at $1.3035, not far from a three-month low of $1.2955 also hit on Friday, while the yen managed a 0.2 percent rise against the greenback at 96.23 yen.