* World stocks up 0.2 percent
* Fed meeting eyed; seen pausing on rates, new initiatives
* Financials lift stocks, UK employment data bites
* BOJ raises spending on government bonds by a third
By Veronica Brown
LONDON, March 18 (Reuters) - World share prices firmed on Wednesday, while European government debt fell as rising financial stocks and forecast-beating U.S. housing data prompted more optimism among investors after the last week's rally.
But the stress that has scrambled markets for so long remained on radars. The rare positive U.S. housing figure had no impact on European credit markets, allowing indexes to widen, while sterling dropped after Britain's unemployment rate spiked.
U.S. 10-year Treasury yields inched back above 3 percent and drew in buyers, but the debt price gains were held in check as attention turned to the Federal Reserve's policy outcome later in the day, and speculation over whether it will purchase long-dated bonds to keep interest rates low.
World stocks, as measured by MSCI's all country index rose 0.2 percent to 195.39.
European financials gained, with UniCredit up 12.24 percent, after the company posted a 38 percent fall in 2008 net profit on Wednesday, ahead of analysts' forecasts.
A lot of the impetus came after figures on Tuesday showing a 22.2 percent surge in U.S. housing starts in February and improved economic sentiment in Germany, the euro area's biggest economy.
"Equity markets are trying to shrug off the uncertainty of the last months," market strategist Heino Ruland from Ruland Research said of the concerted push to build gains.
But many analysts were sanguine on the recent purple patch for stocks, wary of several false starts ahead of further economic bad news.
"This is a correction but we're not going to go up every day; one swallow does not make a summer," said Howard Wheeldon, strategist at BGC markets.
That sense of caution was mirrored in European credit markets. The Markit iTraxx Crossover index, made up of 50 mostly "junk"-rated credits, was at 1130 basis points at 1143 GMT, according to data from Markit, 25 basis points wider versus late on Tuesday.
The investment-grade Markit iTraxx Europe index was at 191.25 basis points, 3.25 basis points wider.
On currency markets, the dollar was up 0.1 percent against a basket of major currencies, while sterling dived to a 7-week low against the euro beyond 94 pence after data showing Britain's jobless rose above 2 million.
FED WATCH
Euro zone government bonds were on the back foot as market participants waited for the U.S. Federal Open Market Committee meeting outcome later in the day.
Bund futures traded 45 ticks lower at 122.16.
Leading central banks are taking or contemplating a range of unconventional measures to keep borrowing costs at an ultra-low level as they seek to drag economies out of a deep global downturn.
The Swiss National Bank has combined a rate cut with FX and bond market intervention, the Bank of England has started purchasing government debt with freshly created money, while the Bank of Japan has just sharply increased the level of debt it will buy to support the economy.
But the Fed is probably going to hold fire on plans to buy long-dated debt, analysts say, hoping that stimulus packages implemented so far will kick in soon.
"Expectations (that the Fed will announce a move towards buying U.S. government debt) have increased after the BoJ decision, but I think they may be disappointed," said Antje Prafcke at Commerzbank in Frankfurt.
The BOJ said overnight it was holding interest rates steady at 0.1 percent and increasing its outright buying of Japanese government bonds to 1.8 trillion yen ($18.28 billion) per month from 1.4 trillion yen.
(Additional reporting by Christoph Steiz and Natalie Harrison in London; Editing by Ruth Pitchford)