GLOBAL MARKETS-Bargain hunting boosts world stocks, yen falls

* Global stocks rise on bargain hunting

* Europe up 3.8 percent, Japan 6.4 percent

* Wall Street set for jump at start

* Yen eases versus dollar after recent gains

By Jeremy Gaunt, European Investment Correspondent

LONDON, Oct 28 (Reuters) - World stocks rose sharply on Tuesday and Wall Street looked set for solid gains as investors indulged in a burst of bargain hunting after five straight global trading sessions of steep losses.

The dollar and yen fell, also a reversal of recent trends.

MSCI's all-country world stock index <.MIWD00000PUS> was up more than 2 percent, but only after having fallen nearly 30 percent this month.

Similarly, the badly hit MSCI emerging market stock index <.MSCIEF> gained more than 4 percent on Tuesday. It had lost more than 40 percent so far this month.

"It's no real surprise that bargain hunters are coming into these markets, despite the fact that expectations for the economy are tumbling and the outlook on the corporate front is gloomy," said Henk Potts, strategist at Barclays stockbrokers.

European shares broke a five-day losing streak, helped by a jump in shares of heavyweight oil group BP after its third-quarter earnings beat forecasts.

The FTSEurofirst 300 <.FTEU3> index of leading European shares was up 3.8 percent. The index had been down 23 percent in October, hurt by the credit crisis and recession worries.

The day marked a break in the recent trend which has seen investors battered by crisis after crisis. The latest has been the need for hedge funds and others to cut their holdings of emerging market assets to raise cash for redemptions and to reduce the risk of further losses.

Earlier, Japan's Nikkei average <.N225> closed up 6.4 percent, or 459.02 points, at 7,621.92. But trade was volatile with the benchmark briefly breaking below 7,000 for the first time in 26 years.

"An increasing number of investors have started seeing Japanese stocks as quite cheap and trade volume is picking up accordingly, even if it's only little by little,"said Yoshinori Nagano, chief strategist at Daiwa Asset Management.

YEN SLIPS

One boost for Japanese stocks was a weaker yen. A flight from risk accompanying the credit crisis and global economic downturn has driven it up nearly 20 percent on a trade-weighted basis <.IBOXXFXJPY> this month.

That move was enough to prompt the Group of Seven to warn on Monday that the surging currency posed a threat to financial and economic stability.

The dollar was up 2.6 percent against the yen at 95.23 yen. But the U.S. currency was weaker against other currencies, against which it has recently risen <.DXY>.

The euro brought $1.2554 , up nearly three quarters of a percent, and the pound was worth $1.5731 , a 1.3 percent gain.

By analysts questioned how long it would last.

"There's no sense that the underlying trend of dollar strength and yen strength is set to change," said Daragh Maher, deputy head of Calyon global foreign exchange research in London.

Euro zone government bond prices fell and yields rose.

Two-year paper yielded 2.641 percent , about 5 basis points more than in late Monday trade, while the 10-year Bund yield was 7 basis points up at 3.833 percent .

"Maybe this is the day things turn around ... Maybe we'll see profit taking for a couple of days. The Fed is the next focus," said a trader.

The U.S. Federal Reserve is expected to cut interest rates on Wednesday. (Editing by Mike Peacock)