Falling oil drives world stocks higher

By Natsuko Waki

LONDON (Reuters) - World stocks hit a three-week high on Wednesday as a firmer dollar and concerns about slowing energy demand knocked oil prices still lower after the steepest fall in history from July's record highs.

The dollar hit a 1-1/2 week peak against a basket of major currencies, weighing on oil prices, after a top Fed official said rising inflation could force the central bank to start raising interest rates sooner rather than later.

U.S. crude is now down more than $20 after hitting a record above $147 a barrel and fanning inflation concerns. Wednesday's decline comes after prices suffered their steepest loss in dollar terms last week since futures began trading in New York in 1983.

"We can start to think about inflation pressure easing," said Philip Isherwood, strategist at Dresdner Kleinwort.

"It starts to take some of the pressure off central banks and (let) them think more about economic weakness than about inflation expectations."

The FTSEurofirst 300 index was up 1.6 percent, while the MSCI main world equity index .MIWD00000PUS gained 0.4 percent, rising for six days in a row.

Banks were top gainers, with HBOS (HBOS.L: Quote, Profile, Research, Stock Buzz) soaring 11 percent on market talk of bid interest from Spanish rival BBVA (BBVA.MC: Quote, Profile, Research, Stock Buzz).

Also helping sentiment, second-quarter corporate results from both sides of the Atlantic are proving to be not as disastrous as some had expected.