* MSCI world stocks index up 1.07 percent at 192.34
* U.S. budget deficit forecast to hit $1.75 trillion
* Britain launches scheme to insure toxic bank assets
* Stocks up, bond yields rise, gold falls
(Updates prices to midday New York time)
By Clive McKeef
NEW YORK, Feb 26 (Reuters) - World stocks edged higher, bond yields rose and the U.S. dollar slipped on Thursday as governments made fresh moves to support weak economies and banking systems but at the cost of extra borrowing and rising debt.
Oil prices rose for a third day on expectations of rising demand while gold prices fell for a third day as the need for a safe haven investment waned.
U.S. President Barack Obama forecast a $1.75 trillion budget deficit for the 2009 fiscal year, equal to 12.3 percent of U.S. gross domestic product, the largest share since 1945.
But Obama's budget also included another $250 billion for support of the banking system. For details, see [ID:nLQ649977].
The soaring deficit figure helped to send the benchmark 10-year U.S. Treasury note yield up to three week highs around 3.00 percent.
"The Obama budget, which is a more honest appraisal of the fiscal condition of the U.S. Treasury, reinforces that there will be a boatload of new bond supply to contend with in the years to come," said William Sullivan, chief economist of JVB Financial Group in Florida. "The bond market is reacting to the idea that the supply challenge is huge, if not endless."
Euro zone government bonds also fell to session lows in Thursday, tracking U.S. Treasuries after details of President Barack Obama's 2009 budget forecasts underlined concerns about a deluge of supply and as firmer stock prices cut safety bids.
The two-year Schatz yielded 1.363 percent, 11 basis points more than in late Wednesday trade while the 10-year Bund yield was up 14.5 basis points at 3.134 percent .
STOCKS UP ON HELP FOR BANKS
U.S. stocks rose on Thursday helped by the news that the Obama administration would seek more money to shore up the ailing financial sector, helping bank stocks to recover.
The Dow Jones industrial average gained 106.57 points, or 1.47 percent, to 7,377.46. The Standard & Poor's 500 Index shot up 11.67 points, or 1.53 percent, to 776.57. The Nasdaq Composite Index added 11.91 points, or 0.84 percent, to 1,437.34.
"It's any expectation that the banks will survive better than expected and the fact that the administration delivered just what the market wanted, which was government help, but not overt nationalization," said Cary Leahey, economist at Decision Economics in New York. "That seems to be the magic wand for the stock market at the moment."
Citigroup rose 7 percent to $2.70, while Bank of America gained more than 13 percent to $5.84 and shares of JPMorgan climbed 10.7 percent to $24.05.
European shares closed higher on Thursday, ending a four-day losing streak, as Royal Bank of Scotland led a banking sector encouraged by a new UK scheme to insure non-performing bank assets.
The FTSEurofirst 300 index of top European shares provisionally closed 2.0 percent higher at 730.58 points after hitting a six-year low on Wednesday.
The MSCI world stocks index was up 1.07 percent at 192.34.
DOLLAR
The U.S. dollar fell against the euro with investors seeing less need for a safe haven, though poor U.S. economic data limited losses.
Sales of newly built U.S. single-family homes slumped to a record low in January, while prices fell to their weakest level in five years, according to a government report that highlighted the continued distress in the housing market. [nN25500413].
Though the data was evidence of how poorly the U.S. economy is faring, investors believe with a proactive administration, the United States is more likely to recover than other parts of the world.
"Even with bad data, the U.S. dollar is still a safe-haven play. If the U.S. were alone in the crisis, the euro would be trading two-to-one to the dollar," said Dan Cook, senior market analyst, IG Markets, Chicago. "But this is a global crisis."
The British pound was boosted after the launch of a bank insurance scheme for toxic assets. The dollar touched a three-month high against the yen on continued concerns about the state of the health of the Japanese economy.
The euro was last up 0.3 percent at $1.2742 while sterling was up 1 percent at $1.4335.
Oil prices rose for a third day after evidence this week that U.S. gasoline demand was recovering.
On the New York Mercantile Exchange April crude was up 4.6 percent at $44.49 a barrel.
(Additional reporting by Ian Chua and Kirsten Donovan in London and Blaise Robinson in Paris; Editing by Kenneth Barry)