GLOBAL MARKETS-Stocks surge, dollar drops on Fed plan

* Fed sparks investor binge on world stocks

* Emerging market debt in demand

* Dollar weaker against major currencies, commodities rise (Updates with U.S. markets, changes byline, dateline, previous LONDON)

By Manuela Badawy

NEW YORK, Nov 4 (Reuters) - World stocks rose sharply, touching new two-year highs, while demand for emerging sovereign debt increased and the dollar fell on Thursday as the afterglow of the Federal Reserve's asset buying plan spread.

U.S. government bonds bonds rose after U.S. claims for unemployment benefits rose by more than expected last week, dimming expectations for growth in the closely watched non-farm payrolls numbers due on Friday.

The Fed on Wednesday said it would spend $600 billion buying longer-term Treasury bonds through to the end of next June as part of a renewed quantitative easing (QE) program.

This was a little more than expected, but not enough to spook markets with worries about a worse-than-anticipated U.S. economic picture.

"The Fed did leave the door open and could take further action later down the road. That might be another factor boosting investor confidence," said Keith Bowman, equity analyst at Hargreaves Lansdown in London.

"We have got another major hurdle to come this Friday with the release of U.S. jobs data. The QE2 provided some support, but investors will still be looking to see how the economic data is panning out and where that takes the authorities next."

Stocks in general benefit because of the impact of a huge wave of liquidity into the financial system.

The Dow Jones industrial average <.DJI> was up 126.93 points, or 1.13 percent, at 11,342.06. The Standard & Poor's 500 Index <.SPX> was up 12.41 points, or 1.04 percent, at 1,210.37. The Nasdaq Composite Index <.IXIC> was up 24.94 points, or 0.98 percent, at 2,565.21.

MSCI's all-country world stocks index <.MIWD00000PUS> rose 1.85 percent on the day taking the index to a level last seen before the collapse of investment bank Lehman Brothers in September 2008. MSCI's emerging market index <.MSCIEF> gained 1.6 percent.

The pan-European FTSEurofirst 300 <.FTEU3> index of top European shares was up 1.36 percent climbing to six-month highs and Japan's Nikkei <.N225> closed up 2.17 percent.

"The (Fed) result was slightly pleasantly surprising," said Jonathan Schiessl, investment manager at wealth managers Ashburton in Jersey. "The risk trade is back on."

The trade, which has been running on and off since QE was first anticipated in late August, essentially involves buying emerging markets for their better growth prospects and potential currency appreciation.

Investors have been ploughing into traditionally more risky emerging market sovereign debt. The yield spread between emerging market debt and U.S. Treasuries as measured by JPMorgan <11EMJ> narrowed to levels last seen nearly three years ago.

The move to QE also came as global manufacturing activity has accelerated for the first time in six months, creating a situation in which an already improving world economy has been given a sharp monetary stimulus. [ID:nLDE6A115S]

DOLLAR DUMPED

The U.S. dollar slumped hitting a 28-year low versus the Australian currency and a more than nine-month trough against the euro as a Federal Reserve decision to print more money to buy $600 billion in Treasuries prompted investors to seek returns elsewhere.

The dollar, seen as "the victim", fell against a basket currencies, with the U.S. Dollar Index <.DXY> down 0.94 percent at 75.76.

The euro was up 0.79 percent at $1.4255, a nine-month high. Euro gains are being restrained by concerns over euro zone debt, particularly in Ireland and Greece.

Against the Japanese yen, the dollar was down 0.54 percent at 80.60 from a previous session close of 81.040.

The Fed's commitment to purchase Treasuries, implying low funding costs, brought into focus an expected increased use of the dollar in carry trades, in which the U.S. currency is used to fund purchases in commodities, emerging markets and higher-yielding currencies.

U.S. government bonds were higher, but appetite for Treasury supply in the post-Fed announcement world will be gauged later in the day in an auction of $10 billion of reopened 10-year Treasury inflation-protected securities.

The benchmark 10-year U.S. Treasury note was up 29/32, with the yield at 2.4728 percent. The 2-year U.S. Treasury note was unchanged with the yield at 0.332 percent. The 30-year U.S. Treasury bond was up 1/32, with the yield at 4.05 percent.

The Fed's strategy is to prevent a slide in inflation from becoming a deflationary spiral of falling wages, growth and business activity, and market players say a dramatically steeper yield curve may be the new norm.

In energy and commodities prices, U.S. light sweet crude oil rose $1.53, or 1.81 percent, to $86.22 per barrel, and spot gold prices rose $28.45, or 2.11 percent, to $1376.10 an ounce as the dollar weakened. (Additional reporting by Chris Reese and Gertrude Chavez-Dreyfuss in New York and Atul Prakash and Jeremy Gaunt in London, Editing by Chizu Nomiyama)