GLOBAL MARKETS-Stocks rise, bonds fall on economy optimism

* Nasdaq closes at 15-month high; Treasuries sell off

* Dollar rises on back of higher Treasuries yields

* U.S. yield curve steepest on record (Updates with U.S. markets close)

By Walter Brandimarte

NEW YORK, Dec 21 (Reuters) - Optimism about the economic recovery on Monday encouraged investors to buy stocks and dump U.S. Treasuries, while gold prices fell as investors expected the dollar to remain firm in the beginning of the new year.

Speculation that the Federal Reserve may raise interest rates sooner than forecast drove the dollar to a six-week high against the yen and kept it near its strongest level against the euro in three months.

Investors are growing cautiously optimistic about the economy and more wary about inflation, especially after this month's strong jobs and retail data.

Combined, those expectations inverted on Monday the correlation between a rising dollar and falling stocks that has been in place in the past several months.

"There's a belief that the U.S. economy is recovering at a much more rapid pace than many people had previously thought," said Greg Salvaggio, senior vice president of capital markets at Tempus Consulting in Washington.

"As a result, traders are a little bit anxious about the possibility of a shift in the Fed's interest rate policy next year."

U.S. and European markets were also boosted by merger and acquisition activity and rising energy shares, which gained with higher oil prices earlier in the day.

The advance of legislation in the U.S. Senate that had been stripped of provisions deemed detrimental to insurers and other health companies U.S. markets an additional boost, sending the Nasdaq to a 15-month closing high.

The Dow Jones industrial average <.DJI> ended up 85.25 points, or 0.83 percent, at 10,414.14, while the Standard & Poor's 500 Index <.SPX> gained 11.58 points, or 1.05 percent, to 1,114.05. The Nasdaq Composite Index <.IXIC> was up 25.97 points, or 1.17 percent, at 2,237.66.

Health-care shares stood out, with the Morgan Stanley Health Payor index <.HMO> up 3 percent. For details, see [ID:nN21199371.

Aluminum producer Alcoa rose 7.9 percent after announcing a joint venture to build an aluminum complex in Saudi Arabia, and on a Morgan Stanley upgrade.[ ID:nLDE5BK0I5]

The pan-European FTSEurofirst 300 index <.FTEU3> jumped 1.4 percent to 1,027.87 points, after two consecutive sessions of losses, buoyed by energy shares.

"Some of the laggard fund managers need to put more equity in their portfolios," said Heino Ruland, strategist at Ruland Research, in Frankfurt. "Some of us missed the boat.

"There's no news out that would justify this sort of rise (today), and it's on low volume. I think the rally will go further. The economic recovery in the third quarter was strong, and it will also be in the fourth quarter."

The MSCI all-country world stock index .MIWD00000PUS rose 0.84 percent but the MSCI emerging markets stock index <.MSCIEF> slipped 0.4 percent.

US YIELD CURVE STEEPENS

U.S. Treasury debt prices fell, with the 30-year bond down more than a full point as investors looked to riskier assets.

Bets that the Federal Reserve will have to raise interest rates in the future caused spreads between yields on two-year and 10-year U.S. Treasury notes to widen sharply on Monday, taking the yield curve to its steepest on record.

The yield spread between those two maturities widened to as much as 281 basis points from 274 basis points last week, according to Reuters data.

Also weighing on Treasuries prices were worries about an expected massive wave of government debt issuance next year. Trade volume was thin at the beginning of a holiday-shortened week, exacerbating price moves, analysts said.

The benchmark 10-year U.S. Treasury note was down 34/32, with the yield at 3.6764 percent, up from 3.54 percent late on Friday. The 2-year U.S. Treasury note was down 4/32, with the yield at 0.8639 percent from from 0.80 percent.

Higher Treasury yields, coupled with expectations that the U.S. economy might be recovering faster than expected, led the U.S. dollar to strengthen 0.93 percent against the Japanese yen , to 91.14.

The euro was down 0.41 percent at $1.4282 per greenback. The U.S. Dollar Index<.DXY> , which compares the dollar against a basket of major currencies, was 0.32 percent higher.

Expectations that the U.S. dollar will hold its gains through the beginning of the new year caused spot gold prices to fall $19.30, or 1.74 percent, to $1,092.80.

U.S. crude oil ended 1.21 percent cheaper at $72.47 per barrel, after trading higher during most of the session. Traders said the stronger dollar weighed on prices of the commodity, while trading was volatile due to the expiration upcoming expiration of January futures contracts. (Additional reporting by Leah Schnurr, Ellen Freilich and Steven C. Johnson; Editing by Leslie Adler)