* World stocks hit 3-1/2 week high
* Funds return to emerging markets, drag on U.S. dollar
* China loan expansion seen as positive
* U.S. markets shut for holiday
By Carolyn Cohn
LONDON, Feb 17 (Reuters) - World stocks hit 3-1/2 week highs on Monday, helped by encouraging news on Chinese lending, while the dollar hit six-week lows following recent weak U.S. manufacturing data.
Data at the weekend showed Chinese banks disbursed the highest volume of loans in any month in four years in January, a surge that suggests the world's second-biggest economy may not be cooling as much as some fear.
The dollar hit a six-week low against a basket of currencies after U.S. manufacturing output data on Friday showed an unexpected fall in January
The euro hit a three-week high against the dollar after data on Friday, in contrast, showed Germany and France grew slightly faster than expected in the fourth quarter, pushing the euro zone's recovery up a gear.
Euro zone finance ministers meet in Brussels on Monday.
The run of soft U.S. data has affected the market's expectation regarding the Federal Reserve's tapering path, analysts at Barclays Capital wrote in a note to clients.
"The market could continue to price in a small possibility of the Fed halting the tapering while the U.S. data remains soft," they said.
"But we think the Fed will likely look through the near-term softness in the data and continue to reduce asset purchases by $10 billion in March, as suggested by Fed Chair Yellen's remarks during her testimony to the Congress, which should be dollar-supportive."
U.S. markets are shut for a holiday on Monday.
The MSCI world equity index, which tracks shares in 45 countries, rose 0.3 percent to 3-1/2 week highs, with European stocks also rallying to 3-1/2 week highs.
Italy's FTSE MIB equity index, which outperformed with a 1.6 percent gain on Friday as investors welcomed the likelihood of centre-left leader Matteo Renzi becoming prime minister, rose 0.2 percent.
Italian bond futures rose 25 ticks after ratings agency Moody's lifted Italy's ratings outlook to stable from negative late on Friday.
Safe-haven Bund futures fell 15 ticks.
The denting in tapering expectations and the upbeat Chinese data lifted high-yielding emerging markets by nearly 1 percent, also to 3-1/2 week highs.
The dollar edged up against the yen, however, after data showing Japan's economy grew just 0.3 percent in the fourth quarter, confounding forecasts of a 0.7 percent gain.
Several once-embattled Asian currencies all gained ground as emerging market sentiment improved. The Indonesian rupiah , one of the so-called Fragile Five deficit currencies that have suffered in recent months, did especially well with the dollar down 4 percent in as many days.
The lower dollar in turn tends to be positive for commodities priced in that currency, helping spur gold to a fresh three-month peak at $1,329.55.
In energy markets, Brent oil futures rose 7 cents to $109.16 a barrel, while U.S. crude firmed 56 cents to $100.86.