GLOBAL MARKETS-Euro gains on ECB; stocks up with economic data

* Stocks supported by telecom sector, overseas fears weigh

* Euro gains on expectations ECB will raise interest rates

* Brent oil flat as rebels advance on oil towns in Libya (Updates prices)

By Walter Brandimarte

NEW YORK, March 28 (Reuters) - The euro rose on Monday on expectations of higher euro-zone interest rates while world stocks eked out gains as concerns about Middle East and Japan cast a cloud despite positive economic data.

The euro rose above $1.41 after the president European Central Bank president Jean-Claude Trichet said inflation is above the bank's price stability target, adding to expectations that interest rates could rise as early as next month.

The European currency erased most of its gains later, however, pressured by worries that the defeat of German Chancellor Angela Merkel's party in a key state election means she will have less leeway to financially support debt-stricken members of the euro zone.

Data showing that U.S. consumer spending rose for an eighth straight month rise supported equities.

U.S. consumer spending rose slightly more than forecast as households tapped their savings to cover higher food and energy prices, while inflation accelerated at its fastest pace since June 2009. [ID:nCAT005399]

Lingering worries about unrest the Middle East and Japan's nuclear disaster kept a lid on gains.

"It puts a cap on things for right now, at least until we start to see some earnings come out early in April. That might finally give us a little more upside, assuming that we have good earnings," said Janna Sampson, co-chief investment officer at OakBrook Investments LLC in Lisle, Illinois.

"At some point people have got to price in Japan's problems and the problems in the Middle East that we know about."

The operator of Japan's crippled nuclear plant on Monday said that highly radioactive water has leaked from a reactor. For details, see [ID:nL3E7ES0F3].

An upgrade of the U.S. telecommunication sector by brokerage Robert W. Baird also supported Wall Street stocks.

The Dow Jones industrial average <.DJI> rose 26.07 points, or 0.21 percent, to 12,246.66, while the Standard & Poor's 500 Index <.SPX> gained 1.98 points, or 0.15 percent, to 1,315.78. The Nasdaq Composite Index <.IXIC> was virtually unchanged at 2,742.93.

Shares of AT&T Inc gained 2.6 percent, while Verizon Communications Inc rose 1.4 percent after Robert W. Baird upgraded them, saying AT&T's deal to buy T-Mobile would help stabilize the hyper-competitive industry. [ID:nL3E7ES19O].

In Europe, the FTSEurofirst 300 <.FTEU3> index of top shares closed 0.07 percent higher, also supported by technology stocks. Trading was slow, with volume reaching only 60 percent of the 90-day average.

The MSCI All-Country World Index <.MIWD00000PUS> was down 0.14 percent.

Brent crude oil was 0.7 percent lower at $114.79 a barrel as rebels regained control of key oil towns in Libya. [ID:nL3E7ES07Y]

U.S. Treasuries yields rose after an auction of two-year notes, the first in three weeks, indicated higher yields may be needed to attract bidders on this week's five-year and seven-year note sales.

A $35 billion sale of two-year notes priced one basis point wider than where the notes had traded ahead of the sale, though bidding by indirect bidders was relatively strong at around 33 percent.

The benchmark 10-year U.S. Treasury note was down 4/32 in price, with the yield rising to 3.4536 percent.

The dollar was down against a basket of trading-partner currencies, with the U.S. Dollar Index <.DXY> off 0.13 percent. The euro was up 0.11 percent at $1.4097. (Reporting by Chuck Mikolajczak, Julie Haviv and Karen Brettell in New York; Editing by Leslie Adler)