* MSCI world equity index up 0.8 percent at 192.00
* Hopes for interest rate cuts cushion economic gloom
* Government bonds rally; oil rises from 3-1/2 year low
By Natsuko Waki
LONDON, Nov 21 (Reuters) - European and Asian shares managed to rise and oil rose towards $50 on Friday as expectations of further interest rate cuts helped to cushion deepening gloom about the financial and auto sectors as well as the broader economy.
On Wall Street, the benchmark S&P 500 index fell to its lowest level since 1997 as signs of distress in the economy mounted, led by troubles at Citigroup and U.S. automakers.
However, Citigroup, which fell more than 26 percent on Thursday, rose 6 percent in Frankfurt trading. U.S. lawmakers kept alive prospects for a $25 billion bailout plan for carmakers, although no agreement was reached on Thursday.
Furthermore, hopes that the world's central banks would cut interest rates further -- with talk that China might lower borrowing costs later on Friday -- helped world stocks off an earlier 5-1/2 year low.
"Rumours are only rumours, but investors are always interested in talk that there will be more official steps that could help the market rebound further," said Wu Nan, analyst at Xiangcai Securities. MSCI world equity index was up 0.8 percent after hitting its lowest level since April 2003. The FTSEurofirst 300 index also rose 0.8 percent. Emerging stocks gained 1.8 percent.
U.S. crude oil increased 0.3 percent to $49.55 a barrel, having hit a 3-1/2 year low below $49 earlier.
Investors sought safer government securities even though stocks rebounded. The December bund future rose 43 ticks while the two-year U.S. Treasury yield touched a fresh record low of 0.9586 percent.
The 10-year Treasury note dropped a full point in price to yield 3.112 percent, after hitting 2.990 percent on Thursday -- its lowest level since the 1950s. The 10-year yield was trading at above 4 percent only in June.
"The main risk is the recession and that we are probably ahead of the worst year over the last century in terms of economic growth and that this will take its toll on many industries," said Kornelius Purps, fixed income strategist at UniCredit.
"We are probably only at the beginning of this poor performance in terms of economic growth and other factors will follow. This is quite worrisome and will keep a bid in the bond market."
The yen fell 1.5 percent to 95.11 per dollar after hitting a three-week high beyond 94 earlier. The dollar fell 0.5 percent against a basket of major currencies.
LICENCE TO CUT?
Talk of Chinese interest rate cuts complemented a rumour that authorities might soon announce the creation of a 300 billion yuan fund to support the stock market.
Euro zone interest rates are also expected to fall next month, and possibly earlier. A PMI survey on Friday showed that output of euro zone services and manufacturing business sank much further and faster than expected in November to record lows.
JP Morgan also said that bigger-than-expected declines in Canadian inflation also allow the central bank to cut interest rates more aggressively in December by as much as half a percentage point.
The Bank of Japan, however, kept its key policy rate unchanged at 0.30 percent on Friday. Governor Masaaki Shirakawa said more rate cuts could disrupt markets as they might cause various problems in ensuring smooth fund supply in money markets.
(Additional reporting by Emelia Sithole-Matarise; editing by David Stamp)