GLOBAL MARKETS-Global stocks rally on earnings; oil steady

* MSCI world stock index highest since July, 2008

* Wall street heads for third week of gains; caution grows

* China raises bank reserve requirements

* Middle East tensions boost oil; gold at 5-week high

(Updates prices)

By Wanfeng Zhou

NEW YORK, Feb 18 (Reuters) - Major stock markets rose to over 2-1/2-year highs on Friday as upbeat corporate earnings offset China's latest tightening move and oil prices steadied after rising on Middle East political tensions.

The MSCI all-country world stock index <.MIWD00000PUS> rose 0.4 percent to 347.99, after hitting its highest since late July, 2008. U.S. stock indexes are headed for a third week of gains, though volume has been light in the most recent leg of the rally.

Robust earnings and merger activity have fueled a rally in developed stock markets in recent months. Analysts cautioned the risk of a pullback is growing, with technicals pointing to signs of overbought conditions, but the market has for weeks defied those expectations.

"I've never seen a market like this," said Paul Mendelsohn, chief investment strategist at Windham Financial Services. A market watcher for 35 years, he is taking profits in every area but commodities.

"No matter where we start out in the morning, buyers come in," he said. "I'm showing by every technical and quantitative standard I have, this market is at extreme levels."

The Dow Jones industrial average <.DJI> was up 53.93 points, or 0.45 percent, at 12,374.04. The Standard & Poor's 500 Index <.SPX> was up 0.61 points, or 0.05 percent, at 1,341.04. The Nasdaq Composite Index <.IXIC> was off 1.25 points, or 0.04 percent at 2830.33.

Caterpillar Inc rose 1.8 percent to $105.14 after the equipment maker said machinery sales through dealers accelerated in the three months through January. For details, see [ID:nN18186151]

"There is definitely high anxiety because everyday it looks like the market is at the top and it's going to have to correct," said James Dailey, portfolio manger of TEAM Asset Strategy Funds in Harrisburg, Pennsylvania.

The CBOE Volatility Index VIX <.VIX>, Wall Street's so-called "fear gauge", was on track to end the week about 5 percent higher. The index is usually inversely correlated to the S&P and a rise in the VIX typically means a drop in the stock market.

For analysis stories on stock rally, see [ID:nN18156073] [ID:nN16292615]

OIL IN FOCUS

World equities earlier came under pressure after China raised banks' required reserves half a percentage point to 19.5 percent for the biggest banks, the second such increase this year as government continues the fight against inflation. [ID:nTOE71H068]

European shares <.FTEU3> ended near 29-month highs, with miners hit after China's tightening move.

In Paris, China rejected plans to use real exchange rates and currency reserves to measures global economic imbalances, casting doubt on the ability of Group of 20 major economic powers to reach agreement at a meeting on Friday.

Crude oil prices earlier jumped after Egypt approved the passage of two Iranian warships through the Suez Canal. Israel has called Iran's plans to send navy ships through the Suez Canal a "provocation". [ID:nLDE71G0CU]

U.S. March light crude futures rose to a high of 87.88 a barrel before retreating. Brent crude futures gained hit above $103 a barrel in volatile trading before easing back.

Spreading unrest in the Middle East and North Africa also stoked fears of potential disruption to oil flows and pushed up prices. [ID:nLDE71H15V]

The safe-haven gold rose to a fresh five-week high at $1,390.40 an ounce. Spot gold last traded at $1,386.55. Silver hit fresh 31-year highs.

The euro rose above $1.37 after a senior European Central Bank official was quoted in a media report as saying that the central bank may have to raise interest rates as global inflation pressure mounted. (Additional reporting by Caroline Valetkevitch and Julie Haviv in New York; Editing by Andrew Hay)