GLOBAL MARKETS-World stocks gain, snapping two-day drop

* World stocks flirt with gains after 2 sessions of losses

* Wall Street gains, Europe up, Japan at 11-week low

* Dollar weaker after small talk from G7 (Recasts; adds details, comment; changes dateline, previous LONDON)

NEW YORK, Oct 5 (Reuters) - World stocks rose on Monday, snapping two sessions of declines even though Japan's Nikkei index hit an 11-week closing low, while the dollar fell on the view policy makers are comfortable with a gradually weakening U.S. currency.

A Group of Seven minister meeting was a damp squib to financial markets, with Saturday's statement saying nothing to allay concern over dollar weakness.

But good news came on a report showing the U.S. services sector expanded after a year of contraction. For more see [ID:nN05400003]. Gains in U.S. stocks diminished safe-haven demand, which also pressured the dollar.

"This is a good way to start off the week after a sour nonfarm payrolls on Friday," said Michael Woolfolk, senior currency strategist at BNY Mellon in New York. "We need to see the service sector doing better because it's such a big part of the economy."

Friday's worse-than-expected U.S. jobs report had mostly been dead weight until markets opened in the New York time zone, though investors were still wary ahead of the new U.S. corporate earnings season, which begins this week.

World stocks as measured by MSCI <.MIWD00000PUS> were up 0.9 percent for a month-to-date loss of around 2.3 percent. Investors have been pulling back from equities after a hefty rally that began in March.

But the Dow Jones industrial average <.DJI> gained 85.4 points, or 0.9 percent, to 9,573.07 on Monday. The Standard & Poor's 500 Index <.SPX> rose 11.98 points, or 1.2 percent, to 1,037.19. The Nasdaq Composite Index <.IXIC> added 17.54 points, or 0.86 percent, to 2,065.65.

Financial stocks moved higher after Goldman Sachs upgraded the large-cap bank sector to "attractive" from "neutral," saying share prices for companies in the industry didn't reflect their earnings power. Goldman upgraded Wells Fargo & Co to "buy," and the stock surged 6.4 percent to $27.96.

The FTSEurofirst 300 <.FTEU3> was up around 0.8 percent, lifted by banks and telecoms, after hitting a four-week closing low on Friday.

Japan's Nikkei index <.N225>, however, fell 0.6 percent to an 11-week closing low, dented by shares of exporters on concerns over the fragility of the U.S. economic recovery.

The latest U.S. earnings season begin Wednesday when aluminum company Alcoa Inc , a Dow component, is scheduled to post quarterly results.

With second-quarter earnings primarily boosted by cost-cutting, investors want to see if the latest results will show an improvement in revenues.

DOLLAR SLIPS

Though the U.S. dollar fell after the G7 meeting, the Australian dollar gained as speculation mounted the country's central bank could raise benchmark interest rates this week.

The dollar index, a measure of the greenback's performance against six other major currencies <.DXY>, fell 0.3 percent, while the euro climbed 0.5 percent to $1.4647 . The Australian dollar rose 1.5 percent to US$0.8777.

Group of Seven finance ministers and central bankers, who met in Istanbul at the weekend, broke no new ground on currencies, urging China to strengthen the yuan to help correct global imbalances and saying too much foreign exchange market volatility tended to threaten economic stability.

"G7 turned out to be all bark, no bite," said Boris Schlossberg, director of currency research at GFT Forex in New York. "The market shook off any fears of verbal intervention and went right back to buying euros and selling dollars."

U.S. Treasury debt prices rose on Monday, keeping 30-year yields near recent five-month lows, as bond investors welcomed the weak inflation outlook in an otherwise surprisingly strong gauge of the service sector. Benchmark 10-year notes were last up 5/32 in price, yielding 3.20 percent, down from Friday's close of 3.22 percent.

A rally in euro zone government bonds faltered on Monday after gains in European shares dulled the allure of lower-risk assets. Benchmark 10-year yields were barely changed at 3.12 percent , holding not far from an almost six-month low around 3.09 percent set on Friday.

Gold futures edged up in quiet trade on Monday, whipsawing between a weaker dollar and falling crude oil prices, but staying above the $1,000-an-ounce level.

U.S. crude futures were down 1.2 percent at $69.11 a barrel. London Brent crude were down 1.7 percent at $66.98 a barrel. (Additional reporting by Reuters bureaux worldwide; Editing by James Dalgleish)