* Nasdaq closes at highest since March 2000
* Other Wall Street indexes up nearly 1 percent
* Oil prices drop as Ukraine tensions ease, supply improves
* Dollar rises; Gold dips under $1,300 (Adds closing prices, Nasdaq record and quotes)
NEW YORK, Aug 18 (Reuters) - U.S. and European stock prices surged on Monday, taking a leading U.S. equities index to a 14-year high, as investors breathed easier over the Ukraine crisis and knocked oil prices to lows not seen in more than a year.
U.S. bond prices dropped and the dollar rose after dipping on Friday, when the government in Kiev said its artillery had hit a Russian armored column. Russia denied its forces had crossed into Ukraine.
On Wall Street, a homebuilders rally and an $8.95 billion bid by discount retailer Dollar General Corp for Family Dollar Inc that trumped a bid by Dollar Tree Inc also helped prices.
The Dow Jones industrial average closed up unofficially at 175.8 points, or 1.06 percent, to 16,838.74 while the S&P 500 gained 16.7 points, or 0.85 percent, to 1,971.74.
The Nasdaq Composite added 43.39 points, or 0.97 percent, to 4,508.31. It was the tech-heavy Nasdaq's first day above the key 4,500 mark since March 2000.
Homebuilders' stocks were prominent after the NAHB/Wells Fargo Housing Market index showed that U.S. homebuilder sentiment rose for the third straight month in August. The PHLX housing sector index climbed 1.66 percent.
"People left Friday unsure of whether or not the Ukrainian conflict was escalating and they seem to have come back today thinking it's not," said Rick Meckler, president of LibertyView Capital Management in Jersey City, New Jersey.
In Europe, the pan-European FTSEurofirst 300 index rose 1.2 percent. German blue chips, which are considered especially vulnerable to tensions between the West and Russia, were among the top gainers.
The easing of geopolitical anxieties helped Brent crude oil shed nearly $2 a barrel to reach its lowest price in over a year. Higher Libyan oil output added to already ample supplies.
Brent crude fell $1.93 to settle at $101.60 a barrel, after notching a session low of $101.11, the lowest since June 2013.
U.S. crude for September fell by 94 cents to settle at $96.41, after paring losses from an earlier low of $95.81.
U.S. Treasury debt prices fell after three days of gains last week. Risk appetite grew on upbeat U.S. housing data and the easing tensions in the Middle East and Ukraine.
In late trading, U.S. 10-year notes fell 12/32 in price to yield 2.387 percent from 2.339 percent late on Friday. U.S. 30-year bond prices also slid, dropping more than a point to yield 3.195 percent from 3.129 percent the previous session.
Yields on German 10-year debt, the euro zone benchmark, rose 2.6 basis points to a shade above 1.001 percent.
As equities rose, gold slipped below $1,300 an ounce and was last trading at $1,298.70.
In currency markets, the dollar index, which measures the greenback against six major currencies, was up 0.19 percent. (Reporting by Michael Connor in New York; Additional Reporting by Chuck Mikolajczak, Sam Forgione and Gertrude Chavez-Dreyfuss in New York and Nigel Stephenson in London; Editing by Dan Grebler, Leslie Adler and James Dalgleish)