* S&P rallies 1 pct to regain most of Thursday's losses
* European stocks flat, Russian stocks take another heavy hit
* Crude oil eases after sharp gains on Thursday (Adds close of U.S. markets)
By Herbert Lash
NEW YORK, July 18 (Reuters) - U.S. stocks rebounded and European markets recovered a bit on Friday but the euro dipped below $1.35 for first time since February after a Malaysian airliner was downed in eastern Ukraine and Israel stepped up a ground assault in Gaza.
German Bund yields fell to near record lows as investors bought assets perceived as safe havens after Thursday's crash, a potentially pivotal moment in the worst crisis between Russia and the West since the Cold War.
Wall Street rose a day after the S&P 500 suffered its worst decline since April 10, while European shares underwent more selling after falling heavily on Thursday. They shed most of the day's losses to close slightly lower in a late-day surge, and the S&P rallied 1 percent to recoup almost all its prior day's losses.
MSCI's 45-country all-country world index rose 0.51 percent. The pan-European FTSEurofirst 300 index dipped 0.01 percent to close at 1,363.11 after being down as much as 1.7 percent earlier in the session.
The Dow Jones industrial average closed up 123.37 points, or 0.73 percent, to 17,100.18. The S&P 500 gained 20.1 points, or 1.03 percent, to 1,978.22 and the Nasdaq Composite added 68.699 points, or 1.57 percent, to 4,432.146.
For the week, the Dow rose 0.9 percent, S&P 500 gained 0.5 percent and the Nasdaq added 0.4 percent.
"It seems counterintuitive given the ruthlessness with which the market sold off yesterday, but in the broader context the markets are generating a lot of attractive themes," said Peter Kenny, chief market strategist at Clearpool Group in New York, citing a growing U.S. economy and corporate earnings.
World leaders demanded an international investigation into the downing of the Malaysian Airlines plane with 298 people on board over eastern Ukraine. Kiev and Moscow blamed each other for a tragedy that stoked tensions between Russia and the West.
U.S. President Barack Obama demanded Russia stop supporting Ukraine separatists, but he stopped short of directly blaming Russia for the incident.
Russian markets took the heaviest hit. Dollar-traded stocks in Moscow fell another 1.75 percent to put their losses for the week at 7.7 percent. The rouble recovered almost half a percent on the day.
Israel announced the start of a Gaza ground campaign on Thursday after 10 days of aerial and naval bombardments failed to stop Palestinian rocket attacks.
Gold dipped as buyers cashed in on some of its 1.5 percent overnight jump. The Japanese yen and U.S. government bonds - the safe haven investors usually head for - both gave up some ground.
The dollar rose 0.2 percent to 101.35 yen, while the euro fell 0.01 percent to $1.3524, after earlier briefly dipping below $1.35.
U.S. government bond prices fell, with the 10-year note down 2/32 in price to yield 2.4836 percent.
Crude oil eased after Thursday's sharp gains. Brent settled down 65 cents to $107.24 a barrel. U.S. crude fell 6 cents to settle at $103.13 a barrel.
Additional reporting by Marc Jones in London, Reporting by Herbert Lash; Editing by Nick Zieminski and Chizu Nomiyama