* Europe, U.S. stocks rally on energy lift
* Oil edges off multi-year lows
* Dollar advances after inflation data (Adds open of U.S. markets, byline, dateline; previous LONDON)
By Chuck Mikolajczak
NEW YORK, Dec 15 (Reuters) - Global equity markets rallied on Tuesday as oil prices moved away from multi-year lows, though investors remained mindful of the possibility for more volatility ahead of a widely anticipated increase in U.S. interest rates later this week.
Oil reversed early falls as bargain hunters moved in after crude dropped to its lowest level since December 2008 in the prior session. The bounce helped lift equities in both the U.S. and the Europe.
The S&P energy index .SPNY rallied 2.4 percent as the best performing of the 10 major S&P sectors, putting it on pace for its biggest daily percentage gain in a month.
"I would use the word 'relief' that oil is not down, that is a good thing," said Andre Bakhos, managing director at Janlyn Capital LLC in Bernardsville, New Jersey.
"What the Fed does and says tomorrow could change everything on a dime."
The Fed is scheduled to begin its two-day policy meeting on Tuesday at 1:00 p.m. EST (1300 GMT).
The first U.S. rate rise since 2006 is largely priced in, as traders see an 83-percent chance the central bank will lift its targeted rate range to 0.25 percent to 0.50 percent from the current zero to 0.25 percent range, according to CME Group's (O:CME) FedWatch program.
The Dow Jones industrial average .DJI rose 204.58 points, or 1.18 percent, to 17,573.08, the S&P 500 .SPX gained 25.3 points, or 1.25 percent, to 2,047.24 and the Nasdaq Composite .IXIC added 62.37 points, or 1.26 percent, to 5,014.60.
MSCI's all-country world index .MIWD00000PUS rose 0.9 percent, while the pan-European FTSEurofirst 300 .FTEU3 index rallied 2.8 percent, on track for its best day since Oct. 5.
Brent crude LCOc1 climbed 1.3 percent at $38.40 after falling as low as $36.33 a barrel on Monday, its weakest since December 2008. U.S. crude CLc1 advanced 1.9 percent at $37.
Prices have been falling for weeks due to a global glut of oil and, in the northern hemisphere, a mild start to winter.
Low oil prices and worries about higher interest rates have unnerved investors through the energy-dominated U.S. high-yield corporate bond markets.
Massive amounts of debt sold by energy and mining companies since 2010, much of it in the form of high-yield or 'junk' bonds from small shale gas firms, is facing a wave of credit rating downgrades, and defaults are rising.
Losses this year, as measured by the iShares iBoxx High Yield Corporate Bond ETF HYG.P , are more than 10 percent, in what some investors see as an echo of the 2008 credit crisis. The ETF was up 1.5 percent to $79.98 on Tuesday.
Benchmark 10-year Treasury notes US10YT=RR lost 13/32 in price to yield 2.2711 percent.
The dollar index .DXY , which measures the U.S. currency against a basket of its peers, climbed 0.6 percent to 98.193 after data showed inflation pressures rose in the United States in November, further cementing expectations for a hike in interest rates by the Fed. The euro EUR= lost 0.6 percent to $1.0926.
Gold XAU= edged down 0.2 percent at $1,061.20 an ounce.