World stocks climbed to a new three-week high on Thursday and the euro inched higher ahead of the publication of Irish bank stress tests aimed at capping one of the major risks in Europe's debt crisis.

Stocks have now recovered all of the losses from a sharp sell-off after disaster struck Japan earlier this month and are heading for their third quarterly gain in a row thanks largely to improving U.S. growth.

The yen fell to a fresh 10-month low versus the euro and touched a three-week trough against the dollar as expectations grew that Japan would lag the euro zone and U.S. central banks in raising interest rates. So far this year, the euro has risen nearly 8 percent against the yen.

Rate differentials are playing a big role, especially as there is no probability for the BOJ to become more hawkish, even in the medium to long-term. said Manuel Oliveri, currency strategist at UBS in Zurich.

There is scope for rate expectations to stay supported in the euro zone. German demand and the service sector is strong so price rises are likely to become domestically driven, not just commodity driven.

Europe's FTSEurofirst 300 share index was flat, while Irish shares rose 0.8 percent and yields on Ireland's 10-year government bond were steady at 10.18 percent.

The Irish Independent said Dublin's stress tests would show an additional 20-25 billion euro hole in its banks capital -- broadly in line with expectations -- and will be followed by a radical restructuring of the sector.

The euro was up 0.3 percent at 117.41 yen and the dollar was down 0.1 percent at 82.80 yen after reaching 83.21 yen earlier.

OIL TENSIONS

Brent crude rose toward $116 a barrel and set to become the best performing major asset in the first quarter of 2011 as political unrest in the oil-rich Middle East and North Africa ignited supply concerns.

Higher oil prices, seen as a tax on global growth, have not yet knocked world equities off their stride. Global equities measured by MSCI All-Country World Index advanced 0.3 percent, on track for a 4.2 percent gain for January-March -- the third straight quarterly rise.

MSCI emerging markets index rose for the third day, up 0.7 percent and were on track to gain 1.3 percent for the first quarter, recovering losses from earlier this year when investors shifted their money to developed market equities on concerns over inflation in developing countries.

However, emerging market shares still underperformed developed market equities, whose strong performance was mainly driven by gains in U.S. stocks. The Dow Jones industrial average

is up 6.7 percent this quarter.

While we remain comfortable with being overweight financials, we see less need in making such hard distinctions now given the improving background in China and the reduced scope for economic surprise in the U.S. in the short term, Deutsche Bank said in a note.

Increasingly we find ourselves looking for opportunities across the cyclical stocks as whole, both global and domestic.

JAPAN AVERSION

Japan's Nikkei average added 0.5 percent, with fund managers shifting into construction stocks and smelters while moving away from domestic-demand shares on expectations for a hike in demand as Tokyo said it may spend $120 billion on reconstruction.

Japanese fund managers cut their global stock weighting to a 12-year low in March, while raising their bond weighting to an all-time high as they reduced risk positions after the earthquake, a Reuters survey showed.

Brent crude rose 0.6 percent toward $116 a barrel, on track for a 22.3-percent gain for January-March -- the biggest quarterly rise in almost two years. The global economic recovery also underpinned prices.

However, copper was down 1.7 this quarter.

Yields on benchmark 10-year U.S. Treasuries eased 1 basis point to 3.4331 percent. They are still up about 14 basis points from the beginning of the year though off a nine-month high of 3.7698 percent.

(Additional reporting by Neal Armstrong; editing by Patrick Graham)

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