* European stocks fall; MSCI world equity index up 1.4 percent
* Dollar, government bond yields fall; sterling tumbles
* Oil up 3 percent before OPEC
By Natsuko Waki
LONDON, Dec 17 (Reuters) - Europe failed to extend strong gains in Asian stocks and Wall Street on Wednesday as initial optimism from Federal Reserve's move to slash interest rates towards zero faded, while the dollar fell broadly.
In a surprise move, the Fed cut its target for the benchmark rate to zero to 0.25 percent from 1 percent on Tuesday, virtually exhausting traditional measures to battle the year-long recession. It also promised to take more action by extending its quantitative easing measures.
Wall Street and Asia rallied in the wake of the Fed's move, but Europe failed to follow through.
Government debt prices shot up as investors expect a prolonged period of low interest rates, pushing the benchmark 10-year U.S. Treasury yield to fresh five-decade lows.
The dollar fell across the board after the rate cut, which knocked the currency's interest rate premium.
"The Fed's measures will work positively for stock markets and will help the U.S. economy to slow down the pace of deterioration in the short term," said Masamichi Adachi, analyst at JP Morgan Securities in Tokyo.
"But taking a longer perspective, the Fed's steps alone will not be enough to reverse the economy and we need to examine details of expected economic stimulus measures by the new administration."
MSCI world equity index rose 1.4 percent to hit its highest level since Nov. 11. The FTSEurofirst 300 index of leading European shares fell 0.2 percent. Emerging stocks rose 2.5 percent.
"The Fed can take rates no lower. And lower rates by themselves won't do it. We've seen that in Japan, although it's better to have low rates than high rates, for sure," said Bernard McAlinden, investment strategist at NCB Stockbrokers in Dublin.
U.S. crude oil rose 3.2 percent to $44.98 a barrel, helped by the U.S. rate cut, a weaker dollar and expectations that OPEC would cut supplies at a meeting this week.
The 10-year U.S. Treasury yield stood at 2.23 percent, its lowest since at least 1951.
March Bund futures rose 160 ticks.
The dollar fell 0.5 percent against a basket of major currencies while it fell to 88.47 yen, moving closer to a 13-year low.
Sterling hit record lows of 90.68 pence per euro as expectations of further sharp UK rate cuts intensified following the Fed's action.
Interest rate futures are showing the Bank of Japan could cut interest rates to almost zero from 0.3 percent later this week and possibly follow the U.S. into quantitative easing, reviving a scheme it put in place five years ago. (Additional reporting by Brian Gorman, editing by Mike Peacock)