* Euro jumps, dollar index tumbles after Yellen comments
* Oil recovers slightly as U.S. stockpile up less than forecast
* Benchmark Treasury yields hit four-week lows
* Gold rallies the most in two weeks (Updates to U.S. market close)
By Rodrigo Campos
NEW YORK, March 29 (Reuters) - The U.S. dollar dropped sharply and stocks on Wall Street ended at 2016 highs after Federal Reserve Chair Janet Yellen said the Fed should proceed "cautiously" in deciding when to raise interest rates.
"Given the risks to the outlook, I consider it appropriate for the Committee to proceed cautiously in adjusting policy," Yellen said in remarks to the Economic Club of New York.
Yellen's comments, her first since the Fed held rates steady two weeks ago, appeared to contradict recent hawkish comments from several of her colleagues. dollar fell sharply against a basket of currencies in reaction to Yellen and dollar-priced commodities pared losses. The Thomson Reuters Core Commodity index .TRJCRB was down 0.6 percent after earlier falling as much as 1.4 percent.
"Yellen took the dovish side in the great Fed debate and markets are reacting uniformly to her comments," said John Augustine, chief investment officer at Huntington National Bank.
Crude oil prices cut losses in late trading after data showed a smaller-than-expected increase in inventories.
On Wall Street, technology shares led gains in major indexes and both the S&P 500 and Dow Industrials closed at their highest levels of 2016.
The Dow Jones industrial average .DJI rose 97.72 points, or 0.56 percent, to 17,633.11, the S&P 500 .SPX gained 17.96 points, or 0.88 percent, to 2,055.01 and the Nasdaq Composite .IXIC added 79.84 points, or 1.67 percent, to 4,846.62.
The pan-European FTSEurofirst 300 .FTEU3 stock index ended up 0.5 percent, before Yellen's remarks. MSCI's index of shares in major world markets .MIWD0000PUS rose 0.5 percent. Nikkei futures NKc1 were up 0.7 percent.
WEAKER GREENBACK
The U.S. dollar hit its lowest level against the euro in over a week and fell the most in two weeks against other major currencies after Yellen's remarks.
The euro EUR= hit its highest in seven trading sessions versus the greenback at $1.1303 and the dollar index .DXY fell 0.8 percent, the most since March 17.
"Given the much less-dovish-than-expected commentary we got from a number of Fed speakers last week, many were looking for a shift in tone from Ms. Yellen and we didn't get that," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.
Brent crude oil LCOc1 fell 2.3 percent to $39.34 a barrel and U.S. crude CLc1 lost 2.1 percent to $38.56 in a volatile session.
But crude futures pared losses late in the session after data showed inventories rose by 2.6 million barrels in the week to March 25, compared with analysts' expectations for an increase of 3.3 million barrels.
WTI prices are up almost 50 percent from 12-year lows near $26 touched in February. But the rally has eased over the past week as supply looks set to keep rising.
The U.S. Treasury market rallied, with benchmark yields hitting four-week lows on the expectation that the Fed would raise interest rates only gradually due to global risks.
Benchmark 10-year Treasury notes US10YT=RR were last up 20/32 in price for a yield of 1.8035 percent, down from 1.872 percent late on Monday.
Spot gold XAU= jumped 1.7 percent, the most since March 16, to $1,240.81 per ounce after hitting a one-month low on Monday.