GLOBAL MARKETS-Earnings drive stocks higher, Fed awaited

* MSCI world equity index hits 3-1/2-month high

* Positive earnings spur equity gains before Fed statement

* US Q1 GDP down more-than-expected, inventories drop

By Al Yoon

NEW YORK, April 29 (Reuters) - World stocks rallied on Wednesday and government bonds held firm after forecast-beating earnings overshadowed a report of weaker-than-expected growth in the United States.

Time Warner Inc , the second-largest U.S. cable operator, and Qwest Communications International Inc beat expectations for quarterly results, encouraging gains in broad measures as they rose 3.5 percent and 3 percent, respectively. The Dow Jones Industrials Average climbed 142.73 points, or 1.78 percent, to 8,159.68, its highest since April 17.

In Europe, Germany's Siemens rose 8 percent after reporting strong first-quarter figures, while Spain's Santander , the euro zone's largest bank, gained more than 6 percent after beating Q1 forecasts.

Global shares drew demand even as the U.S. Commerce Department said the American economy shrank 6.1 percent in the first quarter, more than the 4.9 percent decline forecast by economists in a Reuters survey. The report buoyed Treasury debt, which is seen as a safe-haven in recession, but equity investors also took heart in data that showed a sharp decline in inventories. For story, see: [ID:nN29396010].

"What everybody is hanging their hat on is this inventory draw, and the expectation that inventories are that far down that the next thing that's going to happen is that you're going to have to build inventories and we're going to have start manufacturing," said Paul Nolte at Hinsdale Associates in Hinsdale Illinois.

"The expectation is this is the worst and things get better from here because we will start to rebuild inventories."

Shares of diversified manufacturer United Technologies Corp provided some of the biggest lift for the Dow, up nearly 3 percent at $49.25.

In other U.S. benchmark indexes, the Standard & Poor's 500 Index <.SPX> rose 16.58 points, or 1.94 percent, to 871.74. The Nasdaq Composite Index <.IXIC> climbed 37.86 points, or 2.26 percent, to 1,711.67.

The MSCI world equity index <.MIWD00000PUS> jumped 2.49 percent to a three-and-a-half-month high, and a gauge of emerging market stocks <.MSCIEF> rose more than 3 percent.

Investors were anticipating the outcome of the Federal Reserve policy meeting, where the central bank is expected to hold its benchmark interest rate at zero to 0.25 percent.

Benchmark 10-year Treasury notes were little changed at 97-24/32, and their yields, which move inversely to price, held at 3.02 percent from late on Tuesday.

U.S. crude oil rose 1 percent to $50.39 a barrel.

In the currency market, the U.S. dollar fell against the euro as a recovery in share prices in the United States and around the world showed rising risk tolerance. Helping the euro was a European Commission survey showing that economic sentiment in the region improved more than expected in April from March. [ID:nLT148975]

Equity, bond and currency traders awaited a statement from Fed policy makers. With benchmark U.S. interest rates already near zero, the traders and investors are looking for any extension of quantitative easing, and will focus on the central bank's economic outlook following signs that the pace of the economic downturn is lessening. A statement is expected at about 2:15 p.m. (1815 GMT).

The Fed has left interest rates at a record low level since December. After its meeting in March, the U.S. central bank announced plans to boost quantitative easing and pump an additional $1.15 trillion into the economy with purchases of mortgage and U.S. Treasury debt.

The dollar declined against a basket of major trading-partner currencies, with the U.S. Dollar Index <.DXY> down 1.08 percent at 84.255 from a previous close of 85.171.

The euro rose 1.33 percent to $1.3319 from a previous close of $1.3144. Against the yen, the dollar edged higher by 0.59 percent to 96.95 from 96.380.

(Additional reporting by Nick Olivari, Ellen Freilich and Leah Schnurr, Editing by Chizu Nomiyama)