* Stocks also gain as euro zone bank worries fade
* Dollar flat ahead of Fed chief's testimony
* Oil near three-month lows as supply fears ease (Adds close of European bond, stock markets)
By Herbert Lash
NEW YORK, July 14 (Reuters) - The dollar edged higher and global equity markets rose on Monday, lifted by Citigroup's earnings and as investors put aside concerns about euro zone banks and took heart in a fresh round of merger and acquisition activity.
Citigroup Inc reported a stronger-than expected adjusted quarterly profit as its fixed-income business performed ahead of forecasts. The bank also announced a $7 billion settlement over its sale of flawed mortgage securities.
The settlement with the U.S. Justice Department was more than twice what many analysts had expected, but less than the $12 billion sought by the government.
Citigroup shares rose 3.5 percent to $48.65, providing the second-biggest boost to the benchmark S&P 500 index, after Apple Inc.
Europe's biggest markets gained more than half a percent , helped by deal-making in the pharmaceutical sector and easing anxiety about the fallout from problems at Portugal's biggest listed bank.
"There's a bit of a snap-back from the Portugal hiccup," said Philip Orlando, chief equity market strategist at Federated Investors in New York. "And investors are starting to rethink what kind of earnings season we're going to have," he said.
MSCI's all-country world equity index rose 0.63 percent, while the FTSEurofirst 300 index of top European shares closed up 0.84 percent at 1,363.49.
The Dow Jones industrial average rose 132.71 points, or 0.78 percent, at 17,076.52. The Standard & Poor's 500 Index was up 11.19 points, or 0.57 percent, at 1,978.76. The Nasdaq Composite Index was up 29.75 points, or 0.67 percent, at 4,445.24.
The dollar drifted around the unchanged mark against most major currencies but edged higher against the Japanese yen as investors awaited congressional testimony on Tuesday by Fed Chair Janet Yellen on U.S. monetary policy.
The dollar was up 0.2 percent against the yen at 101.58 , while the euro rose 0.04 percent to $1.3613. The dollar index was 0.04 percent lower at 80.156.
U.S. Treasuries prices slipped on expectations Yellen could take a less-accommodative stance on interest rates in her congressional testimony on Tuesday.
Benchmark 10-year U.S. Treasury notes were last down 8/32 in price to yield 2.5486 percent.
Brent crude oil steadied around $107 a barrel, close to its lowest in three months after weeks of sharp falls on signs of improving supply from key producers and weak demand in some consuming centers.
Brent crude slipped 2 cents to $106.64. U.S. crude futures fell 6 cents to $100.77 a barrel. (Reporting by Herbert Lash; Additional reporting by Patrick Graham in London; Editing by Meredith Mazzilli and Dan Grebler)