* World stocks extend rally, just below year high
* Wall Street set for gains
* Dollar weaker in thin trade
By Jeremy Gaunt, European Investment Correspondent
LONDON, Dec 29 (Reuters) - World stocks floated below year highs on Tuesday, extending a year-end rally with Britain's FTSE rising to pre-Lehman levels. Wall Street looked set to join in with gains at the open.
Holiday-affected trading was thin, but risk appetite continued to dominate on most markets.
The dollar was weaker, 10-year euro zone government bond yields hit 6-week highs and the cost of insuring European company debt through credit default swaps fell to a year low.
MSCI's all-country world stocks index <.MIWD00000PUS> was up about a third of a percent. It was around half a percent below its 2009 high, reached on December 3.
The index has gained some 32 percent this year and is up nearly 75 percent from a low on March 9. This has come as investors have put worries about a major world financial collapse behind them.
European shares gained, with the FTSEurofirst 300 <.FTEU3> up 0.4 percent, rising for the sixth consecutive session.
"Europe is up some more today, but obviously volumes are very low, with most traders away from their desk. We expect there to be low volume sessions right up until the New Year," said Manoj Ladwa, senior trader at ETX Capital.
Earlier, Japan's benchmark Nikkei <.N225> spent much of the day in negative territory before edging up a mere 3.83 points at 10,638.06.
But it did hit a fresh four-month intraday high of 10,683.12 in early trade.
"Investors seem to be using the last days of this year to search for theme stocks -- companies connected to emerging markets, which are likely to remain strong next year, as well as resource-linked shares," said Noritsugu Hirakawa, a strategist at Okasan Securities.
WEAKER DOLLAR
The greater risk appetite among those investors who were trading weakened the dollar while the euro and higher yielding currencies such as the Australian dollar gained.
With volumes very thin, analysts were wary of drawing too many conclusions from current intraday movements, with the euro still trading within its recent range against the dollar, albeit at the top end.
Against the yen, the dollar stayed supported.
The dollar was a third of a percent down against a basket of
major currencies <.DXY>. The euro was at $1.4445
Ten year-euro zone government bonds were yielding 3.372 percent. (Additional reporting by Joanne Frearson; Editing by Chris Pizzey)