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GLOBAL MARKETS-Euro, stocks recover on hopes of Greek deal

* Stocks rebound on signs Greece to obtain bank funding

* Oil falls below $ 61 barrel as other commodities weigh

* Treasury yields rise on Fed rate hike outlook (Adds close of European bond, stock markets)

By Herbert Lash

NEW YORK, Feb 17 (Reuters) – The euro rebounded on Tuesday and global equity markets recovered to trade near break-even on signs Greek banks will continue to get emergency funding despite a breakdown in debt talks between Athens and euro zone finance ministers.

Stocks on Wall Street pared early losses on news Greece said it intended to ask Wednesday for an extension of its loan agreement with the euro zone that would be apart from a full bailout program, a source in Brussels said.

U.S. equities have been grinding higher lately, with major indexes notching a second week of solid gains last week and the S&P 500 setting a new closing high on Friday. Much of the advance came on signs of progress for a Greek debt deal and reduced tensions between Russia and Ukraine despite continued clashes in some areas.

Traders said the market was pricing in the prospect of a last-minute deal on Greece.

“The costs of a Greek exit (from the euro zone) are so great for Greece, they will eventually strike a deal. Yesterday’s meeting should not be seen as a failure, but more part of a necessary process,” said James Butterfill, global equity strategist at Coutts in London.

MSCI’s all-country world stock index rose 0.08 percent, rebounding from earlier losses, while the pan-European FTSEurofirst 300 index closed up 0.18 percent at 1,504.86.

On Wall Street, the Dow Jones industrial average rose 27.04 points, or 0.15 percent, to 18,046.39. The S&P 500 gained 3.94 points, or 0.19 percent, to 2,100.93 and the Nasdaq Composite added 7.78 points, or 0.16 percent, to 4,901.62.

Even as Greek financial markets slipped, with the main Athens stock index falling as much as 4.7 percent before closing down 2.5 percent, on the whole investors kept their composure on expectations a compromise would eventually be reached.

Greek stocks cut their losses while Italian and Spanish 10-year government debt yields rose only slightly. Earlier, safe-haven buying of U.S. Treasuries on concerns about Greece and Ukraine dissipated.

“The decline yesterday was in very thin trading. The market recognizes that Greece is fairly isolated … without much of a contagion impact,” said Marc Chandler, global head of currency strategy at Brown Brothers Harriman in New York.

U.S. Treasury debt yields rose on growing expectations the Federal Reserve could change the language in its next monetary policy statement to flag a possible interest rate increase as early as June.

U.S. Treasury debt yields rose on growing expectations the Federal Reserve could change the language in its next policy statement to flag a possible interest rate increase as early as June.

Benchmark 10-year Treasury notes were down a point in price to yield 2.1361 percent, up from 2.05 percent late on Monday.

The euro rose 0.63 percent against the dollar to $ 1.1423 and against sterling it bounced from within a whisker of a seven-year trough of 73.69 pence set last week.

The euro zone single currency was also helped by a German ZEW survey that showed analyst and investor sentiment rose in February to its highest in a year.

Spot gold fell as much as 2.1 percent to its lowest since Jan. 8 at $ 1,205.72 an ounce in earlier trade and was last down about 1.9 percent at $ 1,206.30.

“People think that eventually things will move towards a solution because there is a lot at stake in the euro zone,” Julius Baer analyst Carsten Menke said.

Oil slipped below $ 61 a barrel, dragged lower by weakness in some other commodity markets, though threats to Middle East crude supplies and expectations lower prices may prompt a slowdown in U.S. output limited the fall. Brent later rebounded.

Brent crude rose 10 cents to $ 61.50 a barrel. U.S. crude dropped 56 cents to $ 52.22 a barrel.

(Reporting by Herbert Lash; Editing by James Dalgleish)

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