GLOBAL MARKETS-World stocks, oil prices rally

* World stocks gain on earnings optimism

* Israel warning to Iran stokes oil, Swiss franc rally

* Sterling falls after BoE inflation report (Updates prices, adds details, comment)

By Wanfeng Zhou

NEW YORK, Feb 16 (Reuters) - World stocks reached 30-month highs on Wednesday on strong corporate earnings, while oil and the Swiss franc rallied after Israel said a move by Iranian warships to traverse the Suez Canal was a "provocation."

The comments by Israel's foreign minister, together with anti-government protests in Libya, Yemen, Bahrain and Iran, raised concern Middle East tensions could disrupt oil supplies. For details, see [ID:nLDE71F2AV] [ID:nLDE71F0T5]

The MSCI world equity index <.MIWD00000PUS> rose 0.7 percent to 345.48, after hitting its strongest since August 2008.

Brent crude surged to near 2-1/2 years highs above $104 a barrel . U.S. crude for March delivery climbed as high as $85.95 a barrel, extending gains after crude oil and gasoline stockpiles rose less than expected last week.

"The Iran story is certainly escalating the geopolitical risk," said Greg Salvaggio, senior vice president of capital markets at Tempus Consulting in Washington.

Wall Street advanced, with the S&P 500 closing at twice its value from just two years ago, a bounce whose vigor has not been seen since the Great Depression. Stocks were boosted by Dell Inc. earnings and a flurry of deal news.

The Dow Jones industrial average <.DJI> was up 61.53 points, or 0.50 percent, at 12,288.17. The Standard & Poor's 500 Index <.SPX> gained 8.31 points, or 0.63 percent, to 1,336.32. The Nasdaq Composite Index <.IXIC> rose 21.21 points, or 0.76 percent, to 2,825.56.

"It seems that there's just a lot of pent-up demand, and the market is very quick to shrug off news that could appear negative," said Angel Mata, managing director of listed equity trading at Stifel Nicolaus in Baltimore.

European shares <.FTEU3> posted a 29-month closing high for the third straight day, supported by strong earnings from French bank Societe Generale and brewer Heineken .

The gains followed an earlier jump in Japan's Nikkei average <.N225> to a nine-month high. Emerging stocks <.MSCIEF> were up 0.5 percent.

SAFE-HAVEN FRANC

The U.S. dollar fell more than 1 percent to a session low of 0.9554 Swiss franc on trading platform EBS on tensions between Israel and Iran. The franc is often seen as a safe-haven in times of geopolitical turmoil. The euro slipped 0.2 percent versus the franc .

The dollar also fell versus the euro on the news from Israel. Traders said the dollar was being sold on the view that this could be a security threat for Israel.

"Should there be a conflict with Israel, this would be bad for the U.S. as well," said Brian Dolan, chief currency strategist at Forex.com in Bedminster, New Jersey.

Douglas Borthwick, managing director at FX execution firm Faros Trading, said the market's reaction provided further confirmation the greenback is losing its flight to quality status.

"The market moved into the euro rather than the U.S. dollar, showing the euro is now the flight to quality destination," he said.

Sterling fell after the Bank of England downgraded its economic outlook in its quarterly inflation report, even as consumer prices spiked higher, stoking fears of stagflation and dampened expectations UK interest rates would rise sooner rather than later.

"The key guidance being that any tightening ahead is likely to prove modest with potentially only 0.50 point of tightening in 2011," said Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi UFL.

Inflationary pressures may also be building up in the United States, a potentially troubling development for the Federal Reserve. Data on Wednesday showed U.S. core producer prices in January rose to their highest rate in more than two years. See [ID:nN16ST1]

Fears of rising inflation pushed Treasury debt prices lower. Benchmark 10-year Treasury yields were at 3.63 percent, off their recent highs of 3.77 percent set last week. (To see an analysis on market inflation expectations click on, [ID:nN15149987]) (Additional reporting by Gene Ramos, Robert Gibbons, Gertrude Chavez-Dreyfuss, Chris Reese and Rodrigo Campos; editing by Andrew Hay)