World stocks powered higher on Thursday as hopes grew that the U.S. economic decline was reaching a bottom while the euro gained despite expectations of an interest rate cut from the European Central Bank.

Investors were also closely tracking the meeting of G20 leaders in London, looking for confirmation that governments will continue to take action to bolster the world economy and shore up the ailing financial system.

Market participants are becoming more convinced of a global recovery and that is causing risk appetite to increase, said Toru Umemoto, chief FX strategist Japan at Barclays Capital.

MSCI's all-country world stock index, a leading benchmark for global equities, was up 1.9 percent for a 22 percent gain since early March.

It was driven higher by strong gains in both Europe and Asia.

The FTSEurofirst 300 <.FTEU3> index of top European shares was up 2.6 percent, on track for its third straight day of gains, helped by better-than-feared U.S. home sales and factory data.

The index has risen 18.4 percent since hitting a lifetime low on March 9, but is still down 8.1 percent in 2009.

We think the (global) policy effort will work, said Bernard McAlinden, strategist at NCB Stockbrokers in London. But there will continue to be volatility in markets. The ECB is to meet later in the day and is widely expected to cut interest rates by 50 basis points to 1.0 percent. Focus is also on whether the bank will announce any unconventional policy measures.

Earlier, Japan's Nikkei average <.N225> gained 4.4 percent, with volume jumping to a four-month high.

WEAKER DOLLAR

The dollar fell against a basket of major currencies as global stock markets rallied.

Trading ranges were tight as markets waited for the ECB, however.

If (ECB President Jean-Claude) Trichet mentions any untraditional measures this could be a negative surprise for the euro, said Toru Umemoto, chief FX strategist Japan at Barclays Capital.

The euro was up a quarter percent at $1.3265, but still in sight of Monday's two-week low near $1.3100 and chart support at its 100-day moving average of $1.3137.

The dollar index, a gauge of the greenback's strength against a basket of key currencies, dropped 0.1 percent to 85.301 <.DXY>.

On euro zone government bond markets, the two-year Schatz, which is sensitive to shifts in interest rate expectations, yielded 1.26 percent, two basis points more than in late Wednesday trade.

The 10-year Bund yield was three basis points up at 3.021 percent.

(Additional reporting by Charlotte Cooper in Tokyo, and Brian Gorman and Veronica Brown in London)

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