GLOBAL MARKETS-World stocks rise on M&A; oil up on Middle East

* M&A activity supports global shares

* Wall Street edges up but faces resistance

* Euro slips back after hitting multi-month highs

* Brent crude hits $120 a barrel on Middle East unrest (Updates prices, adds details)

By Leah Schnurr

NEW YORK, April 4 (Reuters) - Merger and acquisition activity helped buoy global equities on Monday, but gains were kept in check after recent highs, while expectations of higher euro zone interest rates took the euro briefly to an 11-month high against Japan's yen.

Brent crude oil prices rose above $120 a barrel to the highest level since before the collapse of Lehman Brothers and the global financial crisis in September 2009. driven up on worries over the unrest in Libya and the Middle East and potential supply threats.

On Wall Street the broad S&P 500 <.SPX> edged higher as it faced levels where selling has clustered in recent sessions. It was hovering just above 1,333, a level that it has been unable to close above since mid-February.

The S&P recorded its best two-week period since December on Friday and the Dow industrials <.DJI> hit its highest intraday level since June 2008.

"It wouldn't be unhealthy to see a period of consolidation in the short term, but with this kind of momentum you sometimes don't get that pause," said Richard Ross, global technical strategist at Auerbach Grayson in New York.

The Dow Jones industrial average <.DJI> added 15.18 points, or 0.12 percent, to 12,391.90. The Standard & Poor's 500 Index <.SPX> edged up 0.81 points, or 0.06 percent, at 1,333.22. The Nasdaq Composite Index <.IXIC> gained 1.51 points, or 0.05 percent, to 2,791.11.

World stocks as measured by MSCI <.MIWD00000PUS> were up 0.3 percent, hovering around a one-month high and up nearly 5 percent for the year to date. European shares rose to a three-week closing high.

"Positive sentiment is coming from mergers. We will see more mergers and acquisitions and it is one of the reasons why the stock market is still trading at these higher levels," a London-based equity trader said.

In the latest acquisition news, Pfizer Inc rose nearly 1 percent to $20.57 after the drugmaker agreed to sell its Capsugel unit, the world's largest maker of hard capsules, to private equity firm KKR & Co for nearly $2.4 billion. Pfizer shares rose 0.8 percent to $20.55. For details, see [ID:nN04165993]

In Europe Belgian chemicals group Solvay launched a bid for French rival Rhodia , driving up Rhodia's shares 48 percent. [ID:nLDE66P0SY]

Vodafone gave back earlier gains to close lower after selling its 44 percent stake in France's second biggest telecom operator SFR to Vivendi . [ID:nLDE73319N]

The FTSEurofirst 300 <.FTEU3> closed up up 0.1 percent at 1,142,84 points, the highest close since March 9. Japan's Nikkei <.N225> also closed up 0.1 percent.

The improving macroeconomic backdrop has been primarily responsible for the bounce-back in equities after tumbling in March on Japan's disaster and unrest in North Africa and the Middle East.

RATES DRIVE EURO

The economic growth improvement has cemented expectations that the ECB will raise interest rates Thursday and led to speculation the U.S. Federal Reserve may be getting closer to withdrawing exceptional liquidity. [ID:nLDE7330AC]

"As the economy turns the corner and gets back on its feet, central bankers are beginning to see inflation as a greater threat than lack of growth," said Jonathan Sudaria, dealer at Capital Spreads.

A top Federal Reserve official said on Monday that U.S. inflation is likely to remain low for now, but policymakers will keep a close eye on potentially self-fulfilling consumer expectations for higher prices. [ID:nN04244409]

Reflecting expectations of differing rate paths, the euro hit an 11-month high against the yen and touched a five-month peak against the dollar. The single currency later slipped back with expectations of an increase in rates already priced in by investors.

In contrast to the ECB, the Bank of Japan is likely to downgrade its economic assessment at its meeting Wednesday and may consider finding more ways to help the economy recover from last month's massive earthquake and devastating tsunami.

The euro briefly popped above 120 yen for the first time since May 2010 and was later at 119.55 yen. It hit a five-month high against the dollar of $1.4269 and was later at $1.42138 .

In commodities markets, North Sea Brent crude oil rose to $120 a barrel.

"The focus remains on headlines out of the Middle East," said Edward Meir, senior commodity analyst at brokers MF Global, despite what he called a "less-than-compelling fundamental backdrop."

ICE Brent was most recently trading up $1.61 at $120.31. U.S. crude rose 45 cents to $108.39 a barrel, after touching $108.78 earlier in the session, its highest since September 2008.

Analysts say the loss of oil from Libya has been more or less offset by Saudi Arabia, while the Japanese crisis should also reduce oil import demand, suggesting "there likely is a statistical surplus in the system right now", Meir said. (Reporting by Leah Schnurr; Additional reporting by Rodrigo Campos in New York, Christopher Johnson in London; Editing by Leslie Adler)