* 203,000 new jobs added in Nov; jobless rate at 7.0 pct
* Dollar rallies against yen
* Bonds retrace earlier losses; investors mull Fed policy
By Herbert Lash
NEW YORK, Dec 6 (Reuters) - Global equity markets surged and the dollar rose against the yen on Friday after stronger-than-expected U.S. jobs data drove confidence in the strength of the economic recovery, even as it boosted the case for scaling back Federal Reserve stimulus later this month.
The debate over when the Fed starts to reduce the flow of cheap money has dominated markets worldwide for months. The main U.S. employment indicator -- nonfarm payrolls -- bolstered the view that the labor market in the world's biggest economy is on the mend.
A total of 203,000 jobs were added last month, the Labor Department said, beating expectations of 180,000, while the unemployment rate dropped three-tenths of a percentage point to a five-year low of 7 percent.
The dollar jumped to session highs against the yen and stocks on Wall Street surged, with the Nasdaq setting a record intraday high for the year and the Dow rising 1 percent.
"I don't think the Fed is in a big rush to do anything drastic in the absence of inflation. A few strong jobs numbers do not mean we are out of the woods," said Michael Marrale, head of research, sales and trading at ITG in New York.
"That said, we are in a very good spot and we can offset growth with tapering and we come out of this in one piece."
Tom Porcelli, chief U.S. economist at RBC Capital Markets in New York, said that rising incomes stand out as even more important than the job gains.
"Wages are strongly driving consumption in this cycle more than any other time. Overall wage gains were the most compelling news in this data," Porcelli said.
The dollar index, which tracks the greenback versus a basket of six currencies, rose 0.15 percent to 80.353.
Against the yen, the dollar was last up 1.09 percent at 102.89 yen. The dollar's gains versus the euro were short-lived, as the euro zone common currency was boosted by rising short-term interest rates a day after the European Central Bank dampened hopes for an imminent easing move.
The euro was up 0.14 percent against the dollar to $1.3687.
Other data also was bullish for stocks. Consumer spending increased 0.3 percent in October, or one-tenth of a percentage point more than expected, after rising 0.2 percent in September.
The Thomson Reuters/University of Michigan's preliminary reading on the overall index on consumer sentiment jumped to 82.5 for December, up from a final reading of 75.1 in November. This was the highest reading for the index since July and topped analyst forecasts for a reading of 76.
MSCI's all-country world equity index, which tracks shares in 45 nations, rose 0.73 percent, while the pan-European FTSEurofirst 300 index was up 0.73 percent to close at a provisional 1,270.53.
The Dow Jones industrial average rose 158.87 points, or 1 percent, to 15,980.38. The S&P 500 gained 17.28 points, or 0.97 percent, to 1,802.31 and the Nasdaq Composite added 31.575 points, or 0.78 percent, to 4,064.74.
U.S. Treasury yields, a benchmark for borrowing costs around the world, briefly climbed above 2.9 percent, and later the 10-year note was trading flat in price to yield 2.8608 percent.
Bund futures settled up 22 ticks at 140.11 euros.
Gold futures were last up 0.06 percent, at $1,232.6 an ounce.
Brent crude was last up 0.21 percent, at $111.21 a barrel. U.S. crude was last up 5 cents at $97.43.