NEW YORK (Reuters) - The U.S. dollar slipped and world stocks rallied in their biggest single-day gain in three months on Tuesday after a Citigroup memo saying the troubled bank made a profit in January and February fuelled the appetite for risk.

The dollar slid across the board as the staff memo by Chief Executive Vikram Pandit eased concerns about Citigroup's prospects and prompted investors to pare back safe-haven bids on the greenback.

U.S. stocks also gained after U.S. Rep. Barney Frank said he is hopeful that the New York Stock Exchange's uptick rule, which slows the pace of short selling and could help calm volatile markets, would be reimposed in about a month.

Gold fell more than 2.0 percent to below $900 (655.55 pounds) an ounce while U.S. and euro zone government debt prices dropped as the rally in equity markets sapped any lingering safety bids.

What really got the market going was the Vikram Pandit memo from this morning, said Stephen Massocca, managing director at Wedbush Morgan in San Francisco. Any little hint of good news and this market was going to take off.

MSCI's all-country world index jumped almost 5.0 percent, its biggest percentage gain in one session since a 5.7 percent rise on December 8.

The rally in stock markets came even as the International Monetary Fund warned that the world economy will likely contract in a Great Recession this year [ID:nLA571598].

In further bleak news, European data suggested economic growth will contract sharply in the first quarter as France, Britain and Sweden reported precipitous falls in industrial output, and German exports dived.

Stock markets already were primed for sharp gains before the Citigroup memo. Asian shares outside Japan posted their best gains in a month, and the benchmark S&P 500 was at its most oversold condition in five months when measured by its 50-day relative strength index, according to Reuters data.

This is a market less sensitive to bad news and more sensitive to good news, said Bob Parker, vice chairman of asset management at Credit Suisse, in London.

The Dow Jones industrial average closed up 379.44 points, or 5.80 percent, at 6,926.49. The Standard & Poor's 500 Index surged 43.05 points, or 6.36 percent, at 719.58. The Nasdaq Composite Index added 89.64 points, or 7.07 percent, at 1,358.28.

Shares of Citigroup, in which the government recently took a large common equity stake to help shore up its battered balance sheet, jumped 38 percent, pushing other banks higher.

The S&P financial index and the KBW banks index both gained 15.5 percent. Citigroup stock had fallen about 80 percent year to date.

European shares, meanwhile, snapped a three-day losing run to close higher, with banking stocks surging on the Citigroup memo.

The pan-European FTSEurofirst 300 index of top shares rose 5.1 percent to close at 690.89. points, the biggest one-day percentage gain since December 8.

The improvement in risk appetite spurred a bounce in the euro, which rose to two-week highs versus the dollar. The yen also rose versus the dollar, though doubts about the Japanese currency's status as a safe port in the global economic storm underpinned an overall defensive tone, traders said.

The dollar fell against a basket of major currencies, with the U.S. Dollar Index down 0.71 percent at 88.661.

Against the yen, the dollar fell down 0.11 percent at 98.68 and the euro rose 0.52 percent at $1.2676.

We're seeing a general rebound in risk appetite given improving stock performance, said Omer Esiner, senior market analyst at Ruesch International in Washington.

The Citigroup memo assuaged fears about the health of the banking sector, undermining the dollar's safe-haven appeal. But this could be all temporary and the market is just probably booking profits on the dollar's recent gains, he added.

Oil fell nearly 3.0 percent a barrel as the U.S. Energy Information Administration revised down its forecast for world oil demand in 2009.

The EIA report certainly didn't help the market. All it did was renew the concerns about demand, said Tom Bentz, analyst at BNP Paribas Commodity Futures Inc.

U.S. crude settled down $1.36 at $45.71, having risen earlier above $48. London Brent settled down 17 cents at $43.96.

The benchmark 10-year U.S. Treasury note dropped 38/32 in price to yield 3.00 percent. The 2-year U.S. Treasury note fell 4/32 in price to yield 1.03 percent.

U.S. gold futures ended sharply lower, falling below $900 an ounce for the first time in a month, as the equity rally lessened economic fears and prompted investors to switch funds out of the safe-haven metal.

Gold for April delivery settled down $22.10 at $895.90 in New York.

The MSCI index of Asia-Pacific stocks outside Japan rose 2.5 percent. But Japan's Nikkei average dipped to a new 26-year closing low for the second session in a row.

(Reporting by Ellis Mnyandu, Gertrude Chavez-Dreyfuss and Pedro Nicolaci da Costa in New York and Brian Gorman, Alex Lawler, Christopher Johnson and Jan Harvey in London; writing by Herbert Lash; Editing by Leslie Adler)

Japan United kingdom Vikram pandit Investment