* World stocks hit 5-week highs
* Equities gain on U.S. govt plan on toxic assets
* Dollar rises on hopes U.S. economy will revive
By Atul Prakash
LONDON, March 24 (Reuters) - World stocks hit five-week highs on Tuesday on optimism a U.S. plan to purge toxic assets from banks' balance sheets could ease the misery of the sector, but the rally also provided investors a chance to take profits.
The dollar rose against the yen and the euro on hopes the U.S. plan, detailed on Monday by U.S. Treasury Secretary Timothy Geithner, will revive the world's largest economy.
This helped the dollar to halt last week's slide, which was sparked by the Fed's plan to buy government debt as part of a move to expand its balance sheet.
The MSCI World index, a gauge of global stocks performance, rose 0.5 percent after rising to its highest level since mid-February. The index, which fell to a six-year low on March 9, has risen in 10 of the last 11 sessions.
The FTSEurofirst 300 index of top European shares rose for a fourth consecutive session and was up 0.4 percent after rising as much as 1.5 percent earlier. It pared gains as investors took profits from recent moves that pushed the index up 15 percent from its 12-year low hit on March 9.
"If this positive momentum can be sustained, and there are further signs that the credit markets are loosening, we could see money that had previously sat on the sidelines re-entering the markets," said Chris Hossain, senior sales manager at ODL Securities.
Appetite for riskier assets such as equities grew after the U.S. government on Monday offered a raft of incentives for private investors to help rid banks of up to $1 trillion in toxic assets that plunged the world economy into crisis.
Latest euro zone economic data was also encouraging. Key gauges of services and manufacturing activity suggested the economic contraction gripping the euro zone eased a little in March, against expectations, but firms continued to slash jobs and prices.
Sentiment also improved after Monday's data showed a surprise rise in U.S. home sales, reviving hopes the battered housing market could be on a recovery path.
But analysts said they wanted to see more evidence before declaring the market has seen its trough. The FTSEurofirst is still down 11 percent this year after plunging 45 percent in 2008 on a crisis that began with U.S. mortgage defaults in 2007 and has pushed much of the world into a deep recession.
"It is way too early to call the end of the bear market. The financials have still recouped only a little part of the big losses," said Philippe Gijsels, strategist at Fortis.
"The Geithner plan is certainly a step in the right direction and should eventually help, but it is not a miracle either. We will have to see whether the plan will actually work," he said.
Analysts said the market could witness more bad news in the coming months.
"Everyone seems very upbeat and people are calling the end of the bear market, but we haven't reached the bottom of the economic cycle -- there's at least three months of painful stuff to come," said David Buik, senior strategist at BGC Partners.
EURO UNDER PRESSURE
In the currency market, the euro was under pressure as euro zone policymakers suggested that interest rates in the region could fall further.
"The initial reaction to Fed quantitative easing was to sell the dollar, but after the Geithner plan people started thinking that the U.S. is perhaps leading the global economy out of all this," State Street currency strategist Lee Ferridge said.
"This U.S. recovery story benefits the dollar against both the yen and the euro," he said.
The dollar index, a gauge of its performance against a basket of major currencies, was up 0.3 percent at 83.693.
Euro zone government bond yields marked a five-day high, while U.S. Treasuries slipped as stocks extended their rally and dealers braced for this week's slew of nearly $100 billion of U.S. bond supply, which opens with $40 billion of two-year T-Notes on Tuesday.
European credit derivative indexes rallied for a second day, after stocks rose sharply. The investment-grade Markit iTraxx Europe index was at 154 basis points, according to data from Markit, 9 basis points tighter versus late Monday.
In commodity markets, gold slipped on the firmer dollar as the metal became costlier for holders of other currencies. But crude oil prices retreated as investors took profits after a 3 percent rally in the previous session. (Additional reporting by Jessica Mortimer and Farah Master; Editing by Andy Bruce)