* MSCI world equity index up 1.8 percent at 215.09
* Bank of America bailout, U.S. fiscal packages boost morale
* Yen, government bonds slip; oil firmer
By Natsuko Waki
LONDON, Jan 16 (Reuters) - World stocks rallied on Friday from the previous day's one-month low while the yen tumbled as U.S. steps to aid banks helped eclipse big fourth-quarter losses from Citigroup and Bank of America.
Bank of America will receive another $20 billion in U.S. government cash and a guarantee against almost $100 billion of potential losses on toxic assets after its acquisition of Merrill Lynch.
The U.S. Congress also advanced legislation to provide nearly $1.2 trillion in emergency spending to fight the worsening economic recession triggered by the global credit crunch.
Bank of America posted a Q4 loss of $1.79 billion, excluding Merrill Lynch, while Citi posted a Q4 net loss of $8.29 billion and said it would split into two operating units. Both stocks, however, rose before the bell.
"The negative earnings-per-share numbers for both Citigroup and Bank of America, and a horrific loss for Citigroup... are worse than the market had expected, but this disappointment is being overshadowed by the colossal bail-out deal for Bank of America," said Martin Slaney, head of derivatives at GFT.
"The predilection being shown by the U.S. government to continue to put up the cash and guarantees required to support the too-big-to-fail players is being lapped up by the markets."
MSCI world equity index rose 1.8 percent, after falling to a one-month low on Thursday. The FTSEurofirst 300 index of leading European shares rose 3 percent.
Despite the rise on Friday, the index is on course for its biggest weekly fall since late November.
Emerging stocks rose 1.8 percent.
U.S. crude oil rose 1 percent to $35.74 a barrel.
In the European government bond market, March German bund futures fell 52 ticks.
The low-yielding yen, which tends to outperform in times of risk aversion, weakened 0.9 percent to 90.58 per dollar.
The dollar fell 0.8 percent against a basket of major currencies.
The euro gained 1.1 percent to $1.3270 having hit a five-week low of $1.3025 on Thursday after the European Central Bank cut interest rates to 2 percent.
The cost of protecting Ireland's debt against default rose sharply after Ireland nationalised Anglo-Irish Bank.
Five-year credit default swaps on Ireland's sovereign debt were quoted by traders as high as 250 basis points from 184 bps on Monday, meaning it costs 250,000 euros to protect 10 million euros of debt.
"At worst it's going to lead to fresh worries about how the Irish economy survives this crisis and how they can service their increasing debt burden," Deutsche Bank credit strategist Jim Reid said in a research note.
(Additional reporting by Natalie Harrison; Editing by Victoria Main)