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* All eyes on Washington amid signs of progress on deadlock * Wall Street stocks rise after equity gains in Europe, Asia * Dollar fades on view Fed tapering could be delayed By David Gaffen NEW YORK, Oct 11 (Reuters) - Hopes that lawmakers were nearing a deal to avert a U.S. debt default bolstered global equity markets on Friday, but bond investors shunned short-dated Treasury debt on concerns that the battle will merely be pushed off to later in the year. President Barack Obama and Republican leaders appeared closer to ending a political crisis that has closed much of the U.S. government and pushed the country close to default. This helped U.S. stocks to their best day since the beginning of the year on Thursday, and Wall Street extended gains on Friday. Still, one of the proposals involves extending the federal borrowing limit for only about six weeks, temporarily putting off a default that could come as soon as next week. As a result, yields on Treasury bills maturing in late November and throughout December spiked on Friday, as banks and major money market funds, including Fidelity, BlackRock and Pimco shy away from holding debt that is at any risk of delayed interest or principal payments. This had already caused yields on bills due in late October and early November to rise; those yields fell only modestly on Friday. "We need the weekend with a minimum of drama before people are comfortable that (a default) is off the table," said Jim Vogel, interest rate strategist at FTN Financial in Memphis. Bills maturing on Dec. 19 now yield 0.185 percent, up from 0.115 percent on Thursday, whereas those bills maturing in January yield about 0.06 to 0.07 percent. In addition, overnight borrowing costs for banks in the $5 trillion repurchase market - which funds day-to-day operations for banks on Wall Street - remain elevated on concern that a default could ripple through key funding markets. "If this carries into next week and we don't see a longer-term settlement in raising the debt ceiling, you will see a lot more volatility," said Jill King, partner and senior portfolio manager at Horizon Cash Management LLC in Chicago. The benchmark 10-year U.S. Treasury note was unchanged in price to yield 2.686 percent. The 2-year U.S. Treasury note traded flat, yielding 0.35 percent. U.S. stocks were higher, following equity gains across the world, after Thursday's biggest rally on Wall Street since the first trading day of the year. The Dow Jones industrial average rose 111.04 points or 0.73 percent, to 15,237.11, the S&P 500 gained 10.64 points or 0.63 percent, to 1,703.20 and the Nasdaq Composite added 31.126 points or 0.83 percent, to 3,791.87. "Once sanity returns, at least temporarily, to Washington the market really should move higher," said Tim Ghriskey, chief investment officer of Solaris Group in Bedford Hills, New York. A survey showed U.S. consumer sentiment deteriorated in October to its weakest level in nine months as the shutdown undermined Americans' outlook on the economy. MSCI's world equity index, which tracks stocks in 45 countries, rose 0.8 percent, while in Europe the FTSEurofirst 300 index of top regional shares rose 0.4 percent to 1,250.05. Shares also rose in Asia. The dollar edged lower against a basket of major currencies but was headed for its first weekly gain in five, as optimism grew for a budget deal out of Washington. The dollar index, which tracks the greenback against a basket of six major currencies, fell 0.05 percent to 80.378. The euro rose 0.2 percent to $1.3551, while the dollar rose 0.3 percent to 98.48 yen. Brent crude oil fell at one point below $111 a barrel, pressured by an improved supply picture, which offset optimism for an end to the U.S. government shutdown. The supply outlook improved as the International Energy Agency said non-OPEC supply would rise by an average of 1.7 million barrels per day in 2014, the highest annual growth since the 1970s. The IEA, the West's energy watchdog, said in its monthly report that the United States would become the world's largest oil producer next year, compensating for anticipated disruption in OPEC production. Brent oil fell 52 cents to $111.28 per barrel. U.S. crude was down $1.13 at $101.90 per barrel.