World stocks headed toward their best annual performance on record on Thursday, albeit a year after suffering their worst.

Wall Street looked set to open with modest gains.

The dollar, meanwhile, was struggling on the last trading day of the year, falling against a basket of currencies as it has done throughout a year of recovering investor risk appetite.

MSCI's all-country stock index, the broadest gauge of world equities, was up about half a percent on the day for an annual gain of more than 32 percent.

If sustained, this would be the index's best yearly performance since its inception in 1988, just pipping the 31.6 percent gained in 2003 in the rally triggered when the invasion of Iraq failed to meet the gloomiest fears.

Investors reaching for the champagne to celebrate 2009, however, might well feel restrained by the fact that the gains follow an unprecedented decline of 43.5 percent in 2008. The index is still about 30 percent below its October 2007 all-time high.

And it has got this far with quite a bit of help.

The story of 2009 has been the massive and unprecedented amounts of liquidity that governments have pumped into the market, Nicholas-Applegate Capital Management said in a note.

The liquidity supplied by government has acted as a floor to credit and given investors confidence to move from non-risky to riskier assets.

That said, 2009's equity gains have been remarkable, particularly after hitting lows in March. MSCI's emerging market index, for example, is up nearly 110 percent since early March.

Many indexes have now recaptured most or all of the losses suffered after the collapse of Lehman Brothers in September 2008. On Thursday, European shares were up about 0.2 percent for a more than 25 percent annual gain.

Many commodities, too, have had a robust year as the world economy showed signs of recovery. The standout was copper, which has risen more than 141 percent for the year.

DOLLAR FALLS

One of the victims of recovering risk appetite this year has been the dollar, which has suffered as money has flowed into high-yielding asset elsewhere.

On Thursday, it was down half a percent against a basket of major competitors. The dollar has weakened about 4.5 percent against the basket over this year although there has been some recent strength.

Trade was extremely light, with Tokyo and several European countries on holiday and many banks on skeleton staff ahead of the New Year holidays.

We're probably seeing some sort of rebalancing. The dollar has had a strong month and people are just taking profits, said Geoffrey Yu, currency strategist at UBS in London.

Euro zone government bond markets were closed.

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