* Euro gains on expectations of rise in interest rates
* Stocks buoyant, led by emerging markets
* Wall Street set for gains
* Portugal sells bill, but pays price
By Jeremy Gaunt, European Investment Correspondent
LONDON, April 6 (Reuters) - Differing prospects for interest rates sent the euro to a 14-month high against the dollar and extended the yen's steep decline on Wednesday as investors prepared for the launch of a tightening cycle in the euro zone.
World shares ticked higher, with emerging markets leading the way -- a reflection of renewed interest in the sector prompted in part by higher expectations for interest rates in developed markets.
Wall Street looked set to open higher.
Focus was also on battered euro zone peripheral economy Portugal. It successfully sold six- and 12-month treasury bills but had to pay a steep price in interest.
The European Central Bank meets on Thursday and is widely expected to raise its benchmark interest rate by 25 basis points from a record low 1.0 percent to curb inflation pressures.
The prospect of the euro zone's first rise in rates since July 2008 pushed the euro to its highest level against the dollar since late January 2010.
It rose as high as $1.4317 and also hit a high of 121.96 yen , its strongest since May 2010. It was later slightly weaker than these levels.
The Bank of Japan also meets on Thursday but if anything it will ease monetary conditions rather than tighten, adding to the attraction of higher-yielding currencies such as the euro.
The generally brighter picture of the world economy that lies behind the trend towards rising rates has pushed stocks steadily higher this year and there were more gains, briefly lifting European shares to a four-week high.
World stocks as measured by MSCI were up a third of a percent. Emerging market stocks gained around three quarters of a percent. The latter are up more than 10 percent since a mid-March low.
Europe's FTSEurofirst 300 gained 0.4 percent.
"Optimism continues to rule even though there are still ... clear and present dangers. Portugal needs to find some financing fast," said Philippe Gijsels, analyst at BNP Paribas Fortis Global Markets.
"The market will continue to be well supported as long as the U.S. Federal Reserve continues to put liquidity into the system. Only when the Fed stops printing will we be able to see the real strength of the economy and markets. And then markets may be disappointed."
PORTUGAL
Portugal sold a total of 1.005 billion euros ($1.43 billion) in 12-month and six-month T-bills, but yields rose sharply from previous auctions last month.
The 12-month T-bill yield rose to 5.902 percent from 4.331 percent in the previous auction three weeks ago, while the yield on the shorter maturity rose to 5.117 percent from 2.984 percent in a sale in early March.
Demand, however, outstripped supply by 2.6 times for the 12-month t-bills and by 2.3 times for the six-month T-bills.
"The bill auctions show that Portugal is able to fund itself in the bill markets, but the cost is substantially higher than previous auctions," said Peter Chatwell, rate strategist at Credit Agricole.
"I suspect that as far as the market is concerned, funding at these levels can only be viewed as a temporary measure."
Portugal is struggling hard to avoid being overwhelmed by its debt burden.
Moody's cut the credit ratings of seven Portuguese banks on Wednesday, pointing to the lenders' weakened financial state and the likelihood a government struggling with debt would limit support for them.
The decision, including downgrades by one or more notches of the senior debt and deposit ratings of seven banks, and downgrades of the standalone credit assessment for five of those banks, comes after Moody's cut Portugal's sovereign rating on Tuesday. (Additional reporting by Jessica Mortimer, Atul Prakash and Patrick Graham; Editing by Toby Chopra)