World stocks extended gains on Friday, rising toward this week's 7-1/2 month high after better-than-expected U.S. employment data reinforced investors' hopes that the world's biggest economy has passed its worst.

Resource and commodity prices also rallied after the data, sending oil prices to fresh seven-month highs, while the U.S. dollar jumped across the board. The data fueled a heavy sell-off in U.S. Treasuries which saw the 30-year bond down a full two points.

The U.S. economy shed 345,000 jobs in May, fewer than the 520,000 job losses expected by economists. Job losses in April and March were also revised downwards, boosting expectations of an economic recovery in the world's largest economy.

Based on the latest job count readings it looks like the economy has hit bottom and the recession is all but over, said Chris Rupkey, senior financial economist at Bank of Tokyo-Mitsubishi UFJ in New York.

The storm clouds of recession appear to be clearing as the green shoots of recovery start to take hold.

The MSCI world equity index <.MIWD00000PUS> trimmed gains after briefly rising 0.7 percent, edging toward this week's October high.

U.S. stock futures surged, with S&P futures rising 1.5 percent, pointing to a strong open on Wall Street.

The FTSEurofirst 300 index <.FTEU3> rose 1.6 percent. Emerging stocks <.MSCIEF> rose 1.5 percent.

The reaction is all over the place, the market turned this into a very bullish (reading) on the economy... said Frank Hsu, director of global fixed income at FIMAT in New York.

European share markets were already rising thanks to mining firms Rio Tinto and BHP Billiton . Shares in these firms had risen more than 9 percent after the former scrapped a costly tie-up with China's Chinalco and announced an iron ore joint venture with BHP.

Markets worldwide have surged as investors have traded in safe-haven assets in favor of higher-yield higher-risk trades.

Treasury prices plunged, with the benchmark note falling a full point in price, the highest yield in over six months while the 30-year long bond fell two points.

The yield spread between the 2-year and the 10-year notes touched its widest level on record.

But some economists said there had been a sobering element to the U.S. data despite the market's knee-jerk reaction. The unemployment rate rose to 9.4 percent, the highest since a matching rate in July 1983 and up from 8.9 percent in April.

I think the jobs data should help the markets initially but the issue is: how far ahead are the markets anticipating recovery? said Subodh Kumar, chief investment strategist, Subodh Kumar and Associates in Toronto.

I think that if you were looking at it in terms of a red light or yellow and green light, this is an amber light while before it was red.

U.S. crude oil briefly surged above $70 a barrel, hitting a fresh seven-month high and adding to Thursday's 4-percent gain.

The June bund future fell more than 60 ticks.

The dollar rose 1.5 percent to 98.04 yen while it rose 0.7 percent to $1.4098 per euro.

STERLING WOES

Sterling was the day's underperformer, falling to a one-week low of $1.6017 after political turmoil intensified, prompting the prime minister to move forward a cabinet reshuffle.

Against the euro, it fell 1 percent to a 2-week low of 88.66 pence.

Early results in Thursday's local elections in the UK suggested a drubbing for the ruling Labour Party. Four ministers have quit the government so far, with one publicly urging Brown to step down to improve the Labour Party's chances at the next general election.

People outside the UK hadn't appreciated how bad the political situation in the UK was becoming and the idea that Gordon Brown might be taken from office came as a shock, Neil Mellor, currency strategist at Bank of New York Mellon said.

Traders also noted that news that UK mining company Rio Tinto is planning a $15.2 billion rights issue was also weighing on sterling.

(Editing by Stephen Nisbet)

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