* European stocks hit 2 1/2-week highs on euro zone PMI
* Russian debt insurance costs rise on EU sanctions
* Emerging-market stocks at 17-month highs after China PMI
* US tech stocks buoyed by Apple; Facebook at record high
By Carolyn Cohn
LONDON, July 24 European stocks hit 2 1/2-week highs and the euro rallied from eight-month lows against the dollar on Thursday after the region's private sector expanded at its fastest rate in three months in July.
Russian debt insurance costs rose after European Union leaders proposed sanctions on Russian banks which are majority-owned by the government. Those measures were proposed after a Malaysian Airlines plane was downed over Ukraine last week, killing 298, possibly by a missile furnished by Russia.
European stocks rose 0.4 percent and the euro hit the day's highs at $1.3484, pulling off eight-month lows, after Markit's Composite Purchasing Managers' Index (PMI) of companies across the euro zone, a good early indicator of overall growth, rose to 54.0 in July from 52.8, its highest since April. Any number above 50 indicates expansion.
The services sector across the 18-member bloc performed better than any of the 39 economists polled by Reuters had forecast. Manufacturers also reported a stronger month than the median Reuters forecast had predicted.
"The activity data offsets some of the weakness we saw last month and that has helped the euro," said Geoff Yu, a currency strategist at UBS.
The dollar index dropped from an earlier six-week peak, although the U.S. currency hit a one-week high against the yen at 101.64.
Russia's five-year credit default swaps rose 17 basis points to 214 bps from earlier on Thursday, according to Markit, following the EU sanctions proposals, which the EU said were likely to be adopted next week.
That means it costs $214,000 a year for five years to insure $10 million of Russian debt against default. Russian government bonds fell.
"If the Europeans do manage to pass some of the new sanctions that are being talked about, and it's a big if, then it really would be a big step for Europe," said Viktor Szabo, portfolio manager at Aberdeen Asset Management.
Emerging-market stocks rose 0.25 percent to 17-month highs after stronger-than-expected HSBC flash PMI data for China, the world's second-largest economy.
The index came in at 52.0 for July, well above forecasts and the highest reading in 18 months. There was also good news on the outlook, with a sub-index of new orders reaching 53.7.
U.S. stock futures were indicating a higher open on Wall Street after the S&P 500's record close on Wednesday. Those gains were powered by Apple Inc, while late trading was dominated by Facebook Inc, whose shares rose 5.5 percent after hours when its results beat forecasts.
A better-than-expected U.S. earnings season is helping sentiment generally. Barclays estimates that of the 22 percent of S&P 500 companies that have reported quarterly results since July 1, 64 percent beat earnings expectations and 65 percent beat revenue estimates.
The prospect of more sanctions against Russia over the Ukraine crisis maintained a safety bid for high-rated bonds.
For U.S. Treasuries, investors were buying more liquid shorter-dated paper, nudging two-year yields below 0.48 percent. But German Bund yields, which have been trading near record lows, edged up on the euro zone data to 1.170 percent.
Gold eased to 1,298.30 an ounce, close to earlier one-week lows.
Crude oil prices ran into renewed selling after a bounce on Wednesday. Brent crude for September delivery fell 26 cents to $107.77 a barrel. U.S. crude lost 28 cents to $102.84. (Additional reporting by Marc Jones and Anirban Nag in London and Wayne Cole in Sydney; Editing by Larry King)