World stocks posted their biggest gains in a month on Tuesday after recent drubbings pushed shares to attractive levels, while the euro rose as investors waded back into risky assets.

The price of crude oil rose with the gains in equities and helped by the weaker dollar after five sessions of declines. Gold prices eased with the decline in risk aversion.

Stocks maintained their luster after the Institute for Supply Management, a U.S. business group, said its index of non-manufacturing activity grew in June for a sixth straight month, though the pace of expansion was its slowest since February.

MSCI's all-country world stock index <.MIWD00000PUS> jumped 2.2 percent, after last week plumbing its lowest point since May 25.

The market had got down to quite an oversold level, said Colin McLean, managing director at fund manager SVM in Edinburgh. Individual stocks are down at support levels in terms of moving averages, and could bounce a bit.

The fall has been a bit indiscriminate over the past few weeks, he added.

The benchmark Standard & Poor's 500 fell every day last week and is down 8.3 percent since December, with investors concerned some countries could suffer a double-dip recession. Signs of weakness in the labor and housing markets as well as a potential slowdown in manufacturing have sparked worries.

But analysts on Tuesday said the data from the Institute for Supply Management on the U.S. service sector, which dominates the U.S. economy, did not suggest a double-dip recession was on the horizon.

In New York, the Dow Jones industrial average <.DJI> rose 129.27 points, or 1.33 percent, to 9,815.75. The S&P <.SPX> gained 14.77 points, or 1.44 percent, to 1,037.35, and the Nasdaq Composite Index <.IXIC> climbed 31.30 points, or 1.50 percent, to 2,123.09.

U.S. equity markets also advanced in anticipation of a $22 billion initial public offering by the Agricultural Bank of China. The IPO, which could set an all-time record, is seen as a key test of investor sentiment, compromised in recent weeks by persistent fears of a stalling global economy.

Comments from a member of the European Central Bank Governing Council, Christian Noyer, relieved concerns about the health of French banks. Noyer said the sector is likely to pass Europe-wide stress tests later this month. His comments followed similar remarks from the French economy minister.

U.S. and European banking shares were higher on Tuesday.

Bank of America Corp shares gained 2.5 percent at $14.18 and the KBW bank index <.BKX> rose 2.3 percent. Financial stocks were the best-performing sector on the S&P 500.

The FTSEurofirst 300 <.FTEU3> closed up 2.6 percent at 991.23 points, bouncing back from six-week closing lows.

French banks Societe Generale , Credit Agricole and BNP Paribas jumped 4.2 to 6.3 percent.

Mining stocks were also in demand. The STOXX Europe 600 Basic Materials <.SXPP> rose 5.1 percent after slipping on Monday. The sector has been recently hammered by worries over the pace of the global economy.

Shares of BP rose 3.7 percent as the company said it had no plans to issue stock and talk persisted of sovereign wealth fund interest in the British oil major.

Markets are a bit oversold. The decline has been quite strong, said Joost de Graaf, senior portfolio manager at Kempen Capital Management in The Netherlands. There are hopes that second-quarter earnings will be OK and will lift some of the negative atmosphere.

The MSCI world index is still down nearly 10 percent for the year. World stocks weakened Monday. U.S. markets were closed on Monday for the Independence Day holiday.

Japan's Nikkei <.N225> closed up nearly 1 percent, coming off a seven-week low. Emerging market stocks <.MSCIEF> jumped 2 percent.

DOLLAR HIT

The more risk-friendly mood hit the dollar, which fell nearly 1 percent against a basket of major trading partner currencies <.DXY>.

The Australian dollar rallied after the Reserve Bank of Australia offered an upbeat assessment of the global economy, spurring appetite for high-yielding currencies, while rising risk demand also boosted the euro.

Australia's central bank held its key interest rate at 4.5 percent, saying the policy was appropriate, given caution in global markets, and said it remained optimistic about the outlook for Asia and the Australian economy.

Relief over the central bank's position boosted global risk appetite, prompting an unwinding of bearish positions in the euro put on amid worries of unsustainable European sovereign debts.

There's been a gradual return of risk appetite, said Ulrich Leuchtmann, currency strategist at Commerzbank in Frankfurt.

The euro rose 0.91 percent at $1.2653. Against the Japanese yen, the dollar declined about a third of a percent to 87.46 yen.

But while investors in most markets signaled rising risk appetite, U.S. Treasury debt prices rose as traders added to bets that the Federal Reserve will cling to an easy monetary policy into the second half of 2011 in a bid to avert a double-dip recession.

In the wake of Friday's U.S. jobs report showing a payroll loss for the first time this year, safe-haven appetite for bonds persisted despite the stocks rebound on Wall Street.

Yields on benchmark 10-year U.S. Treasury notes declined 0.01 percentage point to 2.97 percent.

In commodities, U.S. light sweet crude oil rose $1.29, or 1.79 percent, to $73.43 per barrel, and spot gold fell $12.35, or 1.02 percent, to $1195.60 an ounce.

(Additional reporting by Richard Leong, Edward Krudy, Rodrigo Campos and Vivianne Rodrigues in New York and Brian Gorman and Naomi Tajitsu in London; Editing by Leslie Adler)

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