GLOBAL MARKETS-Dollar falls on Fed talk, stocks rebound

* Dollar falls broadly after talk of large Fed stimulus

* Markets recover after surprise China rate hike

* Stocks rise as earnings becomes focus (Updates with U.S. markets' open, changes byline, dateline; previous LONDON)

By Manuela Badawy

NEW YORK, Oct 20 (Reuters) - The U.S. dollar weakened broadly on Wednesday as investors expected the Federal Reserve will soon offer additional stimulus to the economy, while stocks and commodities recovered after China's surprise interest rate hike.

The dollar fell across the board after talk the U.S. central bank plans to spend $500 billion in bond purchases over the next six months, with an open-ended commitment to do more in the next 18 months. Medley Global Advisors, a consulting firm, described the Fed's plans in a report, a source told Reuters. For details, see [ID:nLDE69J20L].

The prospect of an increase in dollar supply weakened the currency's value while it fueled a rally in equity markets. Such a development also will likely anger emerging economies contending with a flood of capital as investors chase higher yields.

The forex market is "in a bit of a gray area" that should persist at least through a weekend gathering of the G20 and the Fed's November meeting, Camilla Sutton, Scotia Capital currency strategist said. Fed officials are expected to announce plans to pump more money into the economy after their meeting.

"We think the dollar will end the year weaker, but for now, we're probably going to be in a period of more subdued trading until we get a firmer idea of where policymakers are headed," she said.

U.S. stocks rose as investors switched focus to positive corporate earnings from the impact of an interest rate increase by China on the world economy.

China triggered a global risk sell-off on Tuesday when it announced a hike in interest rates, the first in nearly three years.

The move stoked fears among investors about further tightening in one of the global economy's main drivers and coincided with an increase in tensions over global currency policies before a meeting of Group of 20 finance ministers this weekend.

The Dow Jones industrial average <.DJI> was up 125.49 points, or 1.14 percent, at 11,104.11. The Standard & Poor's 500 Index <.SPX> was up 12.33 points, or 1.06 percent, at 1,178.23. The Nasdaq Composite Index <.IXIC> was up 27.23 points, or 1.12 percent, at 2,464.18.

The MSCI all-country world index <.MIWD00000PUS> was up 0.94 percent while Europe's FTSEurofirst 300 <.FTEU3> was up 0.25 percent, helped by the latest Bank of England Monetary Policy Committee minutes, which boosted expectations of further UK quantitative easing.

Japan's Nikkei <.N225> closed down 1.65 percent, with exporters shaken by fears of slowing Chinese growth.

DOLLAR SLIPS

Investors resumed selling the dollar against most currencies on Wednesday, rediscovering an appetite for higher-yielding assets.

The dollar was down against major currencies, with the U.S. Dollar Index <.DXY> off 1.15 percent at 77.288.

The euro was up 0.92 percent at $1.3939 with traders attributing some of the move to comments from German Chancellor Angela Merkel, who said it may be time to think about exit strategies. It hit an 8 1/2-month high above $1.41 last week.

Merkel's remarks on exit strategies from loose monetary and fiscal policy echo similar comments from European Central Bank Governing Council member Axel Weber and contrast with expectations for more monetary easing from the Fed.

Against the Japanese yen, the dollar was down 0.50 percent at 81.15 from a previous session close of 81.560.

U.S. government bond prices were flat to slightly higher in light trading.

The benchmark 10-year U.S. Treasury note was unchanged, with the yield at 2.479 percent. The 2-year U.S. Treasury note was flat, with the yield at 0.36 percent. The 30-year U.S. Treasury bond was up 6/32, with the yield at 3.903 percent.

In energy and commodities, crude oil rose $1.87, or 2.35 percent, to $81.36 per barrel, and gold prices rose $9.55, or 0.72 percent, to $1,344. (Additional reporting by Steven C. Johnson, Daniel Bases, Rodrigo Campos in New York; Editing by Kenneth Barry)