* World shares gain 1.6 pct on hopes for fiscal cliff progress
* Oil nears $110 a barrel as Middle East tension adds support
* Dollar touches a 7-month high vs yen
By Ryan Vlastelica
NEW YORK, Nov 19 (Reuters) - World share markets and commodities surged in early trading on Monday, recovering some of the previous week's sharp losses as traders focused on politicians' comments indicating readiness to compromise to avoid the U.S. "fiscal cliff."
Wall Street stocks climbed more than 1 percent, extending a rally that began on Friday, while crude oil was up more than 2 percent.
U.S. lawmakers indicated compromises were possible in negotiations to avert $600 billion in tax increases and spending cuts due to start in January - the "fiscal cliff" that threatens to send the U.S. economy back into recession.
Democratic Senator Dick Durbin said on CNN, "What I hear is a perceptible change in rhetoric from the other side."
Also appearing on CNN, Republican Representative Tom Price said, "Every member of our caucus appreciates that this fiscal crisis, this challenge that we have, is ever closer."
Opinion polls show that Republicans would shoulder more of the blame if the country goes over the fiscal cliff.
MSCI's world equity index jumped 1.6 percent, its best day since Sept. 14, recovering most of last week's 1.8 percent fall.
"Stocks could rise substantially if U.S. policymakers can negotiate a 'grand bargain' that credibly addresses long-term tax, spending, and entitlement reforms," said Jonathan Golub, strategist at UBS in New York.
The Dow Jones industrial average was up 149.67 points, or 1.19 percent, at 12,737.98. The Standard & Poor's 500 Index was up 20.05 points, or 1.47 percent, at 1,379.93. The Nasdaq Composite Index was up 40.20 points, or 1.41 percent, at 2,893.33.
Optimism in Europe over the prospects of a deal this week to release much-needed aid for Greece also lent support.
European officials are expected to discuss a two-year funding plan for Athens at a meeting on Tuesday, which would postpone any longer-term solution until after a September 2013 German general election.
European Central Bank policymaker Joerg Asmussen said at the weekend that the ministers were likely to agree the deal and leave resolution of a longer-term debt stabilization plan for Greece, at the heart of a disagreement with the IMF, until later.
The euro rose 0.37 percent to a high of $1.2787, well above the two-month low of $1.2661 hit last week and near the top end of its recent range, suggesting the foreign exchange market expects an agreement on Greece.
"This message from the ECB would tell me that, yes, what we are heading to this week is an agreement that would keep Greece out of trouble for the next year or so," said Gilles Moec, senior European economist at Deutsche Bank.
European share markets rebounded from last week's lows, mainly on the growing optimism over the U.S. political negotiations.
The FTSE Eurofirst 300 index of top European shares soared 1.9 percent at 1,076.03, led by sectors tied to the pace of economic growth. Banks climbed 2.9 percent, with U.S. shares of Barclays up 4.7 percent to $15.68.
In the region's main centers, London's FTSE 100, was up 1.8 percent, while Frankfurt's DAX and Paris's CAC-40 rose 2.4 percent.
Safe haven bond markets reflected the stronger risk appetite, with the 10-year U.S. Treasury down 11/32 to yield 1.6199 percent.
The 10-year German government bond fell and its yield rose to 1.362 percent from 1.326 percent on Friday. Traders said there was room for yields to rise if euro zone policymakers reached an agreement at their meeting on Tuesday.
In the currency markets, the dollar briefly extended its gains against the yen on expectations a new Japanese government will push the central bank into taking aggressive monetary stimulus measures to boost growth after next month's elections.
The greenback was flat against the yen at 81.24. Earlier, it rose to its highest level since April 25.
The Bank of Japan began a two-day meeting on Monday but was not expected to take any new policy steps before the Dec. 16 vote.
The rising hopes of a deal on closing the U.S. budget gap, which had clouded the outlook for global growth, spread through commodity markets, lifting oil, copper and gold.
Copper rallied 1.9 percent to $7,752 a ton on the London Metal Exchange, and gold rose $16.3 to $1,729.91 an ounce.
A drop in the dollar index, which had eased from a two-month high hit on Friday, added to demand by making commodities priced in the greenback more affordable for buyers holding other currencies.
Brent crude rose to almost $110 a barrel as the escalating violence between Israel and the Palestinians fueled concern about supplies from the Middle East.
Investors fear the conflict may draw in other countries and possibly disrupt energy exports from the region, which supplies more than a third of the world's crude.
Brent crude for January delivery was up 2.3 percent and U.S. crude futures added 2.4 percent.