World stocks rose for a third day running on Tuesday with banking stocks leading the gains in Europe, while oil hit a six-month peak.

Bank stocks rallied on Wall Street on Monday after sources said major banks may soon repay government bailout funds.

Britain has held talks with investors to gauge their interest in buying its stakes in part-nationalized banks and could begin selling its holdings within a year, according to a source familiar with the matter.

UK Financial Investments, which manages Britain's stakes in Royal Bank of Scotland and Lloyds Banking Group , has sounded out investors who may be interested in buying some of its holdings, the source said.

Last week's pullback in the benchmark MSCI world equity index <.MIWD00000PUS>, coming after nine weeks of uninterrupted gains, proved short-lived as expectations that the worst of the global downturn might be over prompted investors to buy back risky assets.

Overall the market is again playing on the possibility that we may be seeing the end of the global recession and that is pushing risk appetite up, said Antje Praefcke, currency strategist at Commerzbank in Frankfurt.

The MSCI index rose 1 percent to hit a one-week high, while the FTSEurofirst 300 index <.FTEU3> added 0.9 percent. Banking shares were one of the biggest risers on the day.

IMPROVING RISK SENTIMENT

Wall Street rallied on Monday after No. 2 U.S. homebuilder Lowe's raised its full-year forecast due to signs that the housing market's decline may be ebbing.

Lowe's positive results come ahead of Tuesday's U.S. building permits and housing starts data, which should shed light on how the housing market -- the epicenter of the almost two-year credit crisis -- is faring.

U.S. banks rallied after sources familiar with the situation said Goldman Sachs , Morgan Stanley and other banks have applied to repay building of dollars they borrowed under the U.S. government's Troubled Asset Relief Program.

State Street also said it was selling $2 billion of stock and will sell notes to help repay government bailout funds.

Wall Street's fear gauge, the VIX index <.VIX>, fell to as low as 30 on Tuesday, its lowest since the week after Lehman Brothers filed for bankruptcy.

Emerging stocks <.MSCIEF> rose 2 percent.

U.S. crude oil rose 2 percent to $60.18 a barrel after hitting its highest level since early November.

Oil prices have risen from a near five-year low of $32.40 touched in December, tracking gains in stock markets over the last few months as investors looked to equities for signs of recovery in the economy and ailing oil demand.

The June Bund futures fell 62 ticks.

The dollar <.DXY> fell 0.3 percent against a basket of major currencies. The yen lost around 0.4 percent to 96.63 per dollar.

The yen remains vulnerable as firmness in stocks bolsters risk appetite, with people encouraged to buy higher-yielding currencies, said Tsutomu Soma, senior manager in the foreign securities department at Okasan Securities in Tokyo.

(Additional reporting by Naomi Tajitsu, editing by Mike Peacock)

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