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NEW YORK (Reuters) - World stock markets rose on Tuesday but ended well off session highs as U.S. congressional leaders voiced support for military intervention in Syria, while bond yields rose and the dollar gained on strong U.S. manufacturing data.
A report showing U.S. manufacturing hit its fastest pace in more than two years bolstered expectations the Federal Reserve could begin to reduce bond purchases when it meets later this month.
Wall Street stocks rallied at the opening after President Barack Obama said over the weekend that he would seek approval from Congress for a Syria strike, delaying the threat to Middle East stability and oil supplies. But the market pulled back after comments from Republican House Speaker John Boehner expressing support for action.
House Majority Leader Eric Cantor also pledged his support for action, and Nancy Pelosi, Democratic minority leader in the House of Representatives, said she believes Congress will support a resolution authorizing the use of U.S. military force against Syria.
"People still see uncertainty in Syria and want a decision one way or another. Until we see something more definitive we can see rallies continue to be questionable and a lot of selling pressure," said J.J. Kinahan, chief strategist at TD Ameritrade in Chicago.
Traders had braced for a U.S.-led strike against Syria this weekend following chemical weapons attacks that U.S. officials say killed 1,429 civilians.
The U.S. Congress returns from its summer recess on September 9, and will vote on authorizing a strike on Syria. While Obama has been pushing Congress to back his plan, passage is by no means certain.
On Wall Street, where markets were closed Monday for the Labor Day holiday, the Dow Jones industrial average .DJI gained 23.65 points, or 0.16 percent, at 14,833.96. The Standard & Poor's 500 Index .SPX was up 6.80 points, or 0.42 percent, at 1,639.77. The Nasdaq Composite Index .IXIC was up 22.74 points, or 0.63 percent, at 3,612.61.
MSCI's world equity index .MIWD00000PUS, which tracks shares in 45 countries, was up 0.3 percent, while European stocks .FTEU3 ended down 0.4 percent.
Shares of Microsoft (MSFT.O) fell 4.6 percent to $31.88 after it announced a $7.2 billion bid for the phone business of once-dominant Finnish manufacturer Nokia NOK1V.HE. U.S. shares of Nokia (NOK.N) shot up 31.3 percent to $5.12 in heavy volume.
The stronger U.S. data, combined with good data on the eurozone and China manufacturing sectors published on Monday, caused selling in the U.S. bond market to resume.
"The Syria issue had put a floor on bond prices last week," said Mike Cullinane, head of government bond trading at D.A. Davidson in St. Petersburg, Florida.
The 10-year benchmark U.S. Treasury note was down 20/32, its yield at 2.861 percent.
The yield reached as high as 2.902 percent earlier, roughly 3 basis points below a 25-month high recorded on August 22, according to Reuters data.
China's non-manufacturing purchasing managers' index dropped slightly to 53.9 last month from July's 54.1. But it remained solidly in expansion territory and suggested recent government measures are supporting the economy.
The Treasury debt market posted negative returns for a fourth straight month in August, the longest such streak since a period spanning the end of 2010 to early 2011, when it recorded monthly losses for six consecutive months, according to Barclays data.
Traders expect the Fed to start reducing its $85 billion-a-month stimulus program at its September 17-18 policy meeting unless U.S. payroll numbers due on Friday fall considerably short of forecasts.
The U.S. dollar jumped to a six-week high against major currencies after the U.S. manufacturing data bolstered views the Fed will start scaling back stimulus this month.
While expectations of a reduction in Fed bond purchases support the dollar, a near-term withdrawal of Fed stimulus would weigh on stocks, particularly those in emerging markets that have come under pressure in recent months on expectations of capital outflows.
The dollar index, which measures the greenback against a basket of six major currencies, hit a high of 82.516, its highest since July 22. It last traded at 82.358 .DXY, up 0.3 percent.
Australia's dollar bounced more than half a cent as its central bank kept interest rates at a record low 2.5 percent, as expected, on Tuesday.
Central banks in the euro zone, UK, Canada and Japan all meet this week.
Oil and gold prices also rose after comments supporting Obama's call for limited U.S. strikes on Syria. Oil prices also drew support from the improving economic data in the United States and China and concerns over crude oil supply.
Brent crude rose $1.35 to settle at $115.68 a barrel. U.S. oil settled at $108.54, up 89 cents from Friday's settlement. There was no Monday settlement for the U.S. benchmark due to the U.S. Labor Day holiday.
Spot gold rose as high as $1,416 an ounce and was last up 1.4 percent at $1,413.51 an ounce.
Additional reporting by Ryan Vlastelica, Richard Leong and Julie Haviv in New York; editing by Patrick Graham, Clive McKeef and Dan Grebler