GLOBAL MARKETS-Shares rally into weekend, euro up on greenback

* U.S. shares reverse early losses, bank stocks rally

* Spot gold drops for fifth consecutive session

* Government bond prices pared back as stock slide pauses

By Daniel Bases

NEW YORK, May 21 (Reuters) - The euro and U.S. stocks rose on Friday as chances of currency intervention and clarity on Wall Street reforms made investors hedge bets ahead of the weekend after heavy selling on Europe's festering debt crisis.

U.S. banking shares rallied a day after the United States Senate approved a sweeping overhaul of regulations covering financial firms. The Senate bill reduced uncertainty over how hard the legislation could hit bank profits. Investors saw chances it would not be as tough on Wall Street as feared.

Skittish trading on a day when many U.S. equity options and some options on stock indexes expire contributed to market volatility.

The euro headed for its first weekly gain versus the U.S. dollar in six weeks as investors who had bet on the currency's decline bought it back on fears of central bank intervention. [ID:nN21208322].

While European shares closed lower they did bounce up from eight month lows. Latin American equities rallied on the back of U.S. market gains with the theme of neutral positioning running through global markets.

"I think what is happening now is a squaring of positions going into the weekend. I don't think it is anybody buying, but more of people just squaring off (positions)," said Vitali Meschoulam, emerging markets macro strategist at Morgan Stanley in New York.

"You have headline risk both ways, making it hard to take a very strong directional view in the market because there is still a fair amount of uncertainty," he added.

U.S. Treasuries fell as stocks rose while gold lost ground for a fifth consecutive day after reaching a record high one week ago. Crude oil pared earlier losses, a day after touching a seven month low.

Euro zone sovereign debt problems have not been solved but there was progress in the rescue process. German lawmakers on Friday backed the $1 trillion plan for the euro zone. [ID:nSGE64K06K] [ID:nN20244272]

"There has also been some market rumors that central banks would intervene, which in my mind is an unlikely event. However, the very suggestion is enough to make investors pare positions," said Andrew Wilkinson, senior analyst at Interactive Brokers Group in Greenwich, Connecticut.

At the close of U.S. stock market trading, the Dow Jones industrial average <.DJI> rose 125.38 points, or 1.25 percent, to 10,193.39. The Standard & Poor's 500 Index <.SPX> gained 16.10 points, or 1.50 percent, to 1,087.69. The Nasdaq Composite Index <.IXIC> climbed 25.03 points, or 1.14 percent, to 2,229.04.

For the week the Dow industrials fell 4 percent, the S&P 500 lost 4.2 percent and the Nasdaq dropped 5 percent.

The S&P Financial index <.GSPF> rose 3.62 percent from Thursday's three-month low, when the index fell nearly 5 percent.

Shares of Goldman Sachs Group Inc. gained 3.34 percent to $140.62 after analysts cited rumors of a possible settlement with U.S. regulators of civil fraud charges.

The FTSEurofirst 300 <.FTEU3> index of top European shares closed down 0.5 percent at 970.00 points. A late rally in banks pulled the pan-European index off earlier lows, but declines in oil and gas producers helped keep the market in negative territory.

BP fell 4.2 percent after U.S. politicians accused the company of covering up the true extent of the oil spill in the Gulf of Mexico.

MSCI's All-Country equity index <.MIWD00000PUS> rose 0.88 percent while MSCI's emerging market share index <.MSCIEF> rose 0.48 percent. Both indexes were sharply lower earlier in the global trading day.

In Japan the Nikkei <.N225> closed down 2.5 percent and lost 6.5 percent on the week, its biggest weekly drop in more than a year.

EURO REBOUND

European finance ministers met on Friday to discuss changes to budget rules to prevent another Greek-style debt crisis. Many came to the currency's defense.

Jean-Claude Trichet, the European Central Bank President, was quoted in a German daily saying: "It it clear. The euro is not in danger." [ID:nLDE64K1PK]

ECB Governing Council member Ewald Nowotny, head of Austria's central bank, took out full-page advertisements in Austrian newspapers on Friday in a bid to allay concerns about the single currency.

The euro rose 0.82 percent to $1.2567 , its first weekly gain against the greenback in six weeks.

Benchmark 10-year U.S. Treasuries fell 6/32 of a point in price, pushing the yield up to 3.23 percent .

The yield on Europe's 10-year government bond was down 1.6 bps at 2.667 percent. Earlier, it hit a record low of 2.615 percent.

Spot gold prices fell $5.25, or 0.44 percent, to $1176.80. Spot gold is down 5.8 percent from its all-time high of $1,248.95 on May 14.

Crude oil , closed 76 cents lower, or 1.07 percent, at $70.04 a barrel.

(Additional reporting by Leah Schnurr, Rodrigo Campos, Nick Olivari, Wanfeng Zhou in New York, George Matlock, Simon Falush, Naomi Tajitsu in London; Editing by Andrew Hay)