* World stocks rise on economy hopes
* Europe recovers after early losses
* Wall Street set for gains
* Dollar weakens
By Jeremy Gaunt, European Investment Correspondent
LONDON, Jan 5 (Reuters) - Optimism about the world economy buoyed global equities on Tuesday, particularly in emerging markets, but the dollar continued its weak start to 2010.
European shares recovered from early losses to put in gains and Wall Street looked set to open higher.
MSCI's all-country world index was up around 0.4 percent around highs last seen in late September 2008. Its emerging market counterpart gained 1.2 percent.
The FTSEurofirst 300 erased early losses to rise 0.2 percent, adding to 1.4 percent on Monday, the first day of trading for the year.
"People really want to believe in a good 2010 for stocks, and this sentiment is fuelled by strong macro data and the return of the M&A fever," said David Thebault, head of quantitative sales trading, at Global Equities, in Paris.
"We're seeing funds reallocating their assets in favour of equities, and that is something that will support the rally."
Sentiment has been lifted by relatively positive economic data. The U.S. manufacturing sector grew at its fastest pace in nearly four years in December, its fifth consecutive month of expansion.
Japan's Nikkei gained 0.25 percent.
"Investors are seeking more risks thanks to better economic conditions," said Tsutomu Soma, senior manager of foreign securities at Okasan Securities in Tokyo.
However, he said the optimism could change if U.S. jobs data due on Friday disappoints.
"Investors feel they need to have the employment data to confirm the U.S. economy is improving solidly," Soma said.
DOLLAR DOWN
The dollar slipped against a basket of currencies as hopes for the global economy encouraged investors to shift into high-yielding assets.
The dollar index, a gauge of the U.S. currency's performance against six other major currencies, was down 0.3 percent.
The euro was up 0.2 percent at $1.4443 after advancing 0.6 percent the previous day.
Against the yen, the dollar was down 1.1 percent at 91.91 yen.
Euro zone government bonds drifted lower with investors reluctant to take big positions ahead of a busy couple of days for supply and the key U.S. employment report at the end of the week.
"There's a general rise in risk appetite and some better economic signals coming through," said Investec economist David Page. "Those hopes that we'll start to see a pick-up soon are what's weighing on bonds at the moment.
(Additional reporting by Kirsten Donovan and Blaise Robinson; editing by Ron Askew)
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