LONDON- Financial markets kicked off 2010 on an upbeat note on Monday with world stocks driven close to 15-month highs by hopes of a sustainable economic recovery.

Wall Street looked set to open the year higher, but the dollar was weaker against a basket of major currencies and government bonds sold off.

MSCI's all-country world stock index was up more than half a percent, slightly below 2009 highs but around where they were in October 2008 just after U.S. investment bank Lehman Brothers collapsed to trigger financial turmoil.

Other indexes are beyond that mark, with MSCI's emerging market benchmark and its Asian Pacific stocks ex-Japan gauge both at 17-month highs.

Investors were essentially adding to last year's bets that the global economy will improve and that riskier assets such as stocks were oversold when fears of a banking meltdown swept the market.

MSCI' main index gained 31.52 percent last year, the Asian one 68.32 percent and the emerging market benchmark 74.5 percent.

There is a generally a feeling of modest optimism at the start of the year, said Andrew Milligan, head of global strategy at Standard Life Investment. We are looking forward generally to a year of positive growth in most countries and good profits growth for most companies.

He added, however, that investors would need to be selective.

European and Japanese shares were up strongly rose on the first trading session of the year.
The FTSEurofirst 300 index of leading European shares was up three quarters of a percent after gaining 25.7 percent last year while the Nikkei closed up 1 percent, adding to 2009 gains of 19.04 percent.

DOLLAR STRUGGLES

The dollar fell back from early gains, coming off an earlier four-month high against the yen, with the euro getting some support from the euro zone manufacturing data.

Currency investors were focussed on U.S. data this week, starting with Monday's ISM manufacturing survey and culminating in Friday's key U.S. monthly jobs data, which could give further reason to believe the U.S. is on the road to recovery.

Any strength will help support the dollar, BNP Paribas currency strategist Ian Stannard said.

The dollar was down 0.4 percent against major competitors and flat against the yen. The euro gained half a percent to $1.4399.

Euro zone government bonds were weak. The 10-year yield was flat to lower at 3.394 percent and the two-year was at 1.381 percent, up 3 basis points.

(Additional reporting by Jessica Mortimer; Editing by Patrick Graham)

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