* U.S. stocks surge on economic news, corporate upgrades
* Stock gains sap safety bid, weigh on U.S. Treasuries
* US dollar rises versus yen on improved risk sentiment
* Oil gains as housing data spurs economic recovery hopes (Adds close of U.S. markets, changes dateline; previous LONDON)
By Herbert Lash
NEW YORK, March 17 (Reuters) - Welcome news on housing and inflation drove U.S. stocks and oil higher on Tuesday and gave investors reason to raise their tolerance of risk, lifting the dollar versus the yen.
Oil rose nearly $2 a barrel as a 22.2 percent jump in U.S. housing starts, the biggest percentage gain since January 1990 and the first rise since April, sparked hopes the data is a sign a deep U.S. recession has finally touched bottom.
The major U.S. stock indexes surged more than 2.0 percent as surprisingly strong U.S. housing data whetted risk appetite and sapped the bid for safe-haven government debt.
Also driving investor optimism was a smaller-than-expected rise in the producer price index for the month of February, which dented the inflation-hedge appeal of gold.
But the housing data sent the most ripples across Wall Street, mired in the worst bear market since the Depression.
"The housing start figures were way above expectations," said Mike Zarembski, senior commodities analyst for optionsXpress.
If the data proves to be more than a one-off event it would show that the housing market is on the mend and "would improve the whole psychological aspect of the economy," he said.
The Dow Jones industrial average <.DJI> closed up 178.73 points, or 2.48 percent, at 7,395.70. The Standard & Poor's 500 Index <.SPX> rose 24.23 points, or 3.21 percent, at 778.12. The Nasdaq Composite Index <.IXIC> gained 58.09 points, or 4.14 percent, at 1,462.11.
Home Depot
Rising oil prices drove hopes of economic recovery, making
Chevron
Optimism about the banking sector has helped U.S. stocks to rebound from the 12-year lows they slumped to earlier this month. The KBW bank index <.BKX> jumped 6.1 percent.
Shares of networking equipment maker Cisco jumped 4.5 percent after Goldman Sachs added the stock to its conviction buy list.
"The bears are no longer in control," said Carl Birkelbach, head of Birkelbach Management in Chicago.
"It seems the stimulus package and bank rescue plan are going to have an effect. On a long-term basis, the crisis has been averted," he said.
European shares fell after five straight sessions of gain as weakness in mining shares on a drop in metal prices and news of Alcoa's dividend cut outweighed banking sector gains.
The FTSEurofirst 300 <.FTEU3> index of top European shares closed 0.7 percent lower at 715.83 points.
The dollar rose against the yen, as did the euro, which rose above 128 yen, just shy of its highest level this year. The euro also gained against the dollar, lifted partly by data showing improvement in German investor sentiment.
The euro
The dollar fell against a basket of major currencies, with
the U.S. Dollar Index <.DXY> down 0.15 percent at 86.842.
Against the yen, the dollar
Euro zone government bond prices fell as new supply, U.S. and European data and gains on Wall Street more than eclipsed the first down day for European stocks in a week.
Treasuries started the session in the plus column, but gradually lost support when traders unwound some hedges made on new corporate issuance and as a steady stock market climb drew investors away from less risky assets like Treasuries.
The benchmark 10-year U.S. Treasury note
U.S. light crude for April delivery
London Brent crude
Gold fell as the rally on Wall Street and a surprise surge in U.S. housing starts reduced the precious metal's appeal as a safe haven investment.
U.S. gold futures for April delivery
Asian stocks overnight jumped to a one-month high. MSCI's index of Asia Pacific shares traded outside Japan <.MIAPJ0000PUS> rose for a third day, gaining 1.1 percent after touching a one-month high. (Reporting by Ellis Mnyandu, Vivianne Rodrigues, Ellen Freilich and Frank Tang in New York and Jamie McGeever, Joe Brock in London; writing by Herbert Lash)