GLOBAL MARKETS-Greek debt downgrade bites into stocks' rally

* Moody's downgrade of Greece slices into stocks' rally * Euro climbs for 5th straight session * Oil up, but off earlier gains of 2.5 percent or more

By Manuela Badawy

NEW YORK, June 14 (Reuters) - A downgrade of Greece's debt to junk status early Monday afternoon interrupted a global stocks rally, forcing U.S. stock indexes to cut their gains sharply.

Earlier, stocks had rallied around the world and the euro hit a session high on Monday, fueled by strong European industrial data that increased optimism about a global economic recovery.

Moody's Investors Service lowered Greece's sovereign debt rating to 'BA1, which is junk-grade status, from an investment-grade level of A3, citing concerns about risks associated with euro zone's IMF support package. [ID:nWNA3381]

In response to the downgrade, the three major U.S. stock indexes sharply cut their earlier gains of 1 percent or more.

The Dow Jones industrial average <.DJI> was up 56.30 points, or 0.55 percent, at 10,267.37 -- off a session high of 10,328.67. The Standard & Poor's 500 Index <.SPX> was up 7.07 points, or 0.65 percent, at 1,098.67 -- off a session high of 1,105.91. The Nasdaq Composite Index <.IXIC> was up 23.13 points, or 1.03 percent, at 2,266.73 -- off a session high of 2,278.96.

U.S. oil futures prices also retrenched sharply after the Greek downgrade and were last up 90 cents above $74 a barrel. Oil was up about 1 percent, or 71 cents, at $74.49 a barrel -- off an earlier jump of 2.5 percent or more. The morning rally in oil followed the European data, which had relieved concerns about a slowdown in global growth.

The euro retreated from a session high just below $1.23, following the Greek debt downgrade, and was last at $1.2238.

Before the news about Greece's debt rating, the catalyst for financial markets was the April reading on European industrial production -- its year-over-year increase was the biggest percentage gain in almost two decades. which had reassured investors that the global economic recovery could be picking up steam. [ID:nLDE65D0YC]

Safe-haven U.S. Treasuries and gold prices also sharply cut the morning's losses after the Greek debt downgrade.

The benchmark 10-year U.S. Treasury note was down 15/32, with the yield at 3.30 percent. That marked a price improvement of several ticks following the Greek debt downgrade.

Spot gold fell $5.70 to $1,224.50 an ounce, following the Greek debt downgrade.

Before the news about Greece from Moody's, the world stocks index <.MIWD00000PUS> was up 1.6 percent while U.S. equities climbed, following strong advances in European and Asian stock markets. The pan-European FTSEurofirst 300 index<.FTEU3> ended the day at 1,029.59 points, the highest close since May 13.

Japan's Nikkei average <.N225> ended Monday's session up 1.80 percent at 9,879.85, close to its psychological resistance level of 10,000 and above its 25-day moving average. (Reporting by Manuela Badawy; Additional reporting by Caroline Valetkevitch and Wanfeng Zhou in New York and David Sheppard in London; Editing by Jan Paschal)