* World stocks climb 1.5 percent
* Fed announces to buy $300 billion of long-dated Treasuries
* Dollar under pressure, European credit spreads tighten
* Commodities up on hope of pick up in industrial activity
By Atul Prakash
LONDON, March 19 (Reuters) - World shares rose on Thursday as the U.S. Federal Reserve's surprise announcement it would start large-scale buying of government debt sparked optimism that the battered U.S. economy could soon begin to recover.
The announcement put the dollar under severe pressure, sharply lowered U.S. Treasury yields and tightened European credit spreads, while crude oil and metal prices gained on hopes that there would be a pick up in global industrial activity.
The Fed said it would buy $300 billion of long-dated Treasuries over the next six months, its first large-scale purchases of government debt since the early 1960s, while also boosting buying of mortgage-backed securities and agency debt in its bid to rescue the economy.
The Fed had floated the idea of buying Treasuries some time ago but then seemed to go cold on the idea. The sudden change of direction took most investors completely by surprise. The move also effectively amounts to the Fed printing money -- and is hence bad news for the dollar.
World stocks, as measured by MSCI's all country index climbed 1.5 percent to 200.30, while European shares rose 0.4 percent. U.S. stocks rallied overnight as investors bet the Fed's move would kick-start lending.
"With markets coming off lows, there is a growing belief that we are seeing snippets of positive news coming out," said Chris Hossain, senior sales manager at ODL Securities.
"Whilst it is too early to say that the green shoots of recovery are here, the pendulum appears to be swinging back to half way. Only time will tell if we swing back, or the momentum is continued throughout 2009."
But the gains in global stocks dented the dollar's appeal as a relative safe-haven, knocking it down from a three-year peak hit against a basket of currencies earlier in the month.
The dollar index, a gauge of its performance against a basket of major currencies, was flat at 84.206 after a 3 percent slide on Wednesday that was its biggest one-day drop since 1985. Traders said the dollar may resume its fall.
DOLLAR OVERSUPPLY CONCERNS
The Fed move stirred worries that the sharp expansion of the Fed's balance sheet, which has already doubled in size in the past six months, and could lead to an oversupply of the world's main reserve currency.
The U.S. was not alone in buying of government debt. The Bank of England is buying 75 billion pounds of gilts and the Bank of Japan on Wednesday announced it would increase its purchases of Japanese government debt.
The Swiss National Bank surprised markets last week with intervention to weaken the Swiss franc as well as an interest rate cut to fight a deep recession.
In addition, the European Central Bank may also eventually turn to non-standard policy measures after cutting interest rates to a record low 1.5 percent in March.
"We'll have to see how this pans out, but ultimately the Fed are printing paper, the UK are printing paper, the Swiss are printing paper, the Japanese are printing paper -- they are all at it and I don't want to buy those currencies," said David Bloom, global head of FX research at HSBC markets in London.
"I don't believe in the argument that its going to create economic growth and you will get portfolio flows -- forget it, they are sorting out a crisis," he added.
European credit spreads tightened as concerns about risks eased after the Fed announcement. The investment-grade Markit iTraxx Europe index was at 183 basis points, according to data from Markit, 8 basis points tighter versus late on Wednesday.
The Markit iTraxx Crossover index, made up of 50 mostly "junk"-rated credits, was at 1,108 basis points, 25 basis points tighter.
U.S. Treasury yields were steady, after plunging by the most in 26 years the previous day.
Commodity markets were cheered on a glimmer of hope that the Federal Reserve's move would revive the global economy, boost industrial activity and increase demand for oils and metals.
Oil prices rose 1.7 percent to near $49 a barrel, copper climbed to a four-month high and aluminium rose more than 2 percent. (Additional reporting by Veronica Brown)