GLOBAL MARKETS-U.S. stocks, long-term bond yields surge on debt deal hopes
* Wall St indexes up strongly; European shares also gain
* Dollar up against yen, euro steadies
* Gold extends Wednesday's losses
* Oil higher on kidnapping of Libyan PM
By Barani Krishnan
NEW YORK, Oct 10 (Reuters) - U.S. stocks were headed for their best day since the start of the year and yields on longer-dated Treasuries rose on Thursday after President Barack Obama agreed to consider a proposal from Republican lawmakers to avert a historic debt default.
The dollar hit a 2-week high against major currencies before paring its gains.
A White House official said Obama was willing to look at a proposal by congressional Republicans to extend the debt ceiling for six weeks, but insisted that lawmakers also end the 10-day government shutdown. The plan was presented by House of Representatives Speaker John Boehner to fellow House Republicans ahead of a meeting they were to hold with the president.
Wall Street's three key stock indexes - the S&P 500, the Dow and Nasdaq - rose more than 1.5 percent each, heading for their best day since January 2, when markets began trading for the year.
U.S. Treasuries yields rose to their highest in more than two weeks as demand for safe-haven issues fell on views Congress will reach a deal to raise the debt ceiling before an Oct. 17 deadline. The Treasury later in the day sells $13 billion in new 30-year debt.
The dollar was near a three-week high against most major currencies by the middle of the European session.
"Hopes among investors are growing that a thaw is starting to make its presence felt," said Andrew Wilkinson, chief economic strategist at Miller Tabak & Co. in New York.
"Thinking back to December 2012 when the fiscal cliff was fast approaching, investor confidence was repeatedly battered following a series of meetings that failed to hammer a positive outcome. Bottom line, we'll believe it when we see it."
Around 1:30 p.m. EDT (1830 GMT), the Dow Jones industrial average was up 232.24 points, or 1.57 percent, at 15,035.22. The Standard & Poor's 500 Index was up 27.12 points, or 1.64 percent, at 1,683.52. The Nasdaq Composite Index was up 71.60 points, or 1.95 percent, at 3,749.38.
The 45-country MSCI stock index was up 1.4 percent, on track to its strongest showing in 3 months.
European stocks also rallied, closing up 1.7 percent for its best performance in a month. On Wednesday, European equities hit a 1-month low.
The number of Americans filing new claims for unemployment benefits hit a six-month high last week, pressured by the U.S. government shutdown.
Investors expect Republicans and Democrats to cut a deal to raise the debt ceiling before next Thursday's deadline, though each day that passes without an agreement tests their nerves.
U.S. Treasury Secretary Jack Lew said that while the standoff in Congress was stressing financial markets, prioritizing government payments just to avoid hitting the debt limit would be irresponsible.
It is unclear how long a short-term deal would be effective, but any move to raise the country's $16.7 trillion borrowing limit would at least stave off a possible default.
"While we are willing to look at any proposal Congress puts forward to end these manufactured crises, we will not allow a faction of the Republicans in the House to hold the economy hostage to its extraneous and extreme political demands," said the White House official who revealed the Republicans' plan for a short-term deal.
"Congress needs to pass a clean debt limit increase and a funding bill to reopen the government," the official said.
The U.S. dollar index rose 0.1 percent against a basket of currencies. The euro was flat, recovering from early pressure after French and Italian industrial production data fell short of market expectations.
Against the yen, the dollar rallied 0.8 percent to 98.10 , up from a two-month low of 96.55 yen hit on Tuesday. Traders said the dollar rebounded after finding strong support at its 200-day moving average, currently at 96.82.
NEAR-TERM FUNDING PRESSURE DOWN
Strains on short-term U.S. interest rates and funding markets eased after running up in the past two sessions.
The current one-month Treasury bill yields traded at 0.25 percent on Thursday, down from 0.29 percent earlier in the day and Tuesday's five-year high of 0.36 percent.
The benchmark 10-year U.S. Treasury note was down 10/32, its yield at 2.6979 percent.
There were few signs of nerves on European bond markets, however, with German government bonds, typically favored by risk-sensitive investors, edging lower and higher-yielding euro zone periphery debt faring better.
As the dollar regained its footing, gold eased 0.7 percent to below $1,300 an ounce, extending Wednesday's near 1 percent decline.
Oil rose on news Libya's prime minister had been seized by armed gunmen in a Tripoli hotel, although he was later freed.
Brent crude jumped 2.5 percent to $111.74 per barrel and U.S. crude added 1.7 percent to $103.39.
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