* World shares gain 0.8 percent; U.S. stocks higher
* Euro firms against dollar on Italian government formation
* Both Fed and ECB hold policy meetings this week
* Oil edges higher
By Caroline Valetkevitch
NEW YORK, April 29 (Reuters) - World stock indexes and the euro advanced on Monday as the formation of a new government in Italy eased uncertainty about the political future of the country, the third-largest economy in the euro zone, while tame inflation data drove down U.S. Treasury yields.
U.S. stocks jumped, also buoyed by stronger-than-expected U.S. housing data. The S&P 500 extended recent gains and was on track for a record closing high. The index is up 11.9 percent for the year so far.
“Wall Street appears primed for another assault at record highs,” said Andrew Wilkinson, chief economic strategist at Miller Tabak & Co in New York.
U.S. price data showed inflation remained quiet, suggesting the Federal Reserve, which will begin a two-day policy meeting on Tuesday, will not be ending its accommodative monetary stance any time soon.
Recent signs of weak U.S. growth had raised expectations the Fed will keep its pace of bond buying unchanged at $85 billion a month at its meeting this week, while the European Central Bank is widely expected to announce an interest rate cut when it meets on Thursday.
Investors welcomed the formation of a broad coalition government in Italy under new Prime Minister Enrico Letta, two months after inconclusive general elections, though investors remain cautious over how long the new growth-focused government will survive.
The resolution of Italy’s political stalemate helped bring its five- and 10-year borrowing costs down to their lowest level since October 2010 at a bond sale on Monday, while yields on 10-year debt in the secondary market fell 13 basis points to 3.93 percent.
“Italian sovereign debt is benefiting from the twin effects of central bank liquidity support and political stability of sorts,” said Nicholas Spiro, managing director of London-based consultancy Spiro Sovereign Strategy.
MSCI’s world equity index was up 0.8 percent, while the broad FTSE Eurofirst 300 index of top European shares provisionally closed up 0.5 percent, led higher by Milan’s FTSE MIB, which rose 2.2 percent.
The Dow Jones industrial average was up 121.68 points, or 0.83 percent, at 14,834.23. The Standard & Poor’s 500 Index was up 13.74 points, or 0.87 percent, at 1,595.98. The Nasdaq Composite Index was up 34.42 points, or 1.05 percent, at 3,313.68.
The Fed’s stimulus measures have helped U.S. stocks rally for much of this year.
The euro rose 0.5 percent to $1.3095, with hedge funds cited among key buyers. The euro’s session peak of $1.3115, the highest since April 19, was reached midway through the London session.
Some analysts say the euro could weaken should the ECB cut its main interest rate by 25 basis points, from 0.75 percent currently, when it meets on Thursday; a rate cut would erode the euro’s interest rate advantage over the dollar and yen.
“The euro would likely weaken somewhat on that, but the overall move will be muted,” said John Doyle, currency strategist at Tempus Consulting in Washington, D.C. “The expectation is starting to get priced in.”
A Reuters poll of 76 economists last Thursday showed only a narrow majority of 43 expected a 25-basis-point cut at this week’s ECB policy meeting, which would take the bank’s refinancing rate to a record low of 0.5 percent.
Inflation, as reflected in the personal consumption expenditure price index, rose just 1 percent over the 12 months through March, the smallest gain since October 2009 and a slowdown from the 1.3 percent logged in the period through February.
Benchmark U.S. 10-year Treasuries were unchanged, with the yield at 1.665 percent.
U.S. data also showed that contracts to purchase previously owned U.S. homes rose in March as the housing market continued to pick up pace this year.
A weaker dollar helped drive gains in both U.S. crude oil prices and gold.
U.S. light crude was up $1.34 at $94.34. Brent crude was up 59 cents to $103.75 a barrel, after making its biggest weekly gain since November last week.
Spot gold rose 1 percent to a session high of $1,477.70 an ounce but then pared the gains to trade at $1,468.19 an ounce.