* European, U.S. stocks rally on energy lift
* Oil bounces off multi-year lows
* Dollar advances after inflation data (Adds close of European markets, updates prices)
By Chuck Mikolajczak
NEW YORK, Dec 15 (Reuters) - Global equity markets rallied on Tuesday as oil prices bounced from multi-year lows, though investors braced for the possibility for more volatility with a widely anticipated increase in U.S. interest rates due later this week.
Oil reversed early falls to stem a six-day slide 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 United States and the Europe. urn:newsml:reuters.com:*:nL3N1444ZH urn:newsml:reuters.com:*:nL8N14441D
The S&P energy index .SPNY rallied 2.5 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.
Top officials at the Federal Reserve on Tuesday began a two-day policy meeting at 1 p.m. EST (1800 GMT) that is expected to end with the first U.S. interest rate increase since 2006.
The rate rise is largely priced in, as traders see more than an 80-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 FedWatch program.
"(Yellen) is still going to raise rates, which is fine because that is what the market wants. The market has now been prepared for that. The market will have a negative reaction if she chooses not to raise rates and then comes up with some excuse," said Ken Polcari, Director of the NYSE floor division at O'Neil Securities in New York.
The Dow Jones industrial average .DJI rose 191.01 points, or 1.1 percent, to 17,559.51, the S&P 500 .SPX gained 24.18 points, or 1.2 percent, to 2,046.12 and the Nasdaq Composite .IXIC added 55.09 points, or 1.11 percent, to 5,007.32.
MSCI's all-country world index .MIWD00000PUS rose 1 percent, while the pan-European FTSEurofirst 300 .FTEU3 index closed up 2.9 percent, its best day since Oct. 5.
Brent crude LCOc1 climbed 2.6 percent at $38.90 after falling as low as $36.33 a barrel on Monday, its weakest since December 2008. U.S. crude CLc1 advanced 3.3 percent at $37.52.
Prices have been falling for weeks due to a global glut of oil and, in the northern hemisphere, a mild start to winter. urn:newsml:reuters.com:*:nL3N1441FY
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 in recent years, 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. urn:newsml:reuters.com:*:nL1N1431DO
"This is a dead-cat bounce because where there is smoke there is fire and there is plenty of smoke for sure in that high-yield bond market," said Polcari.
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 1.7 percent to $80.15 on Tuesday.
Benchmark 10-year Treasury notes US10YT=RR lost 14/32 in price to yield 2.2729 percent. urn:newsml:reuters.com:*:nL1N1441G1
The dollar index .DXY , which measures the U.S. currency against a basket of its peers, climbed 0.6 percent to 98.161 after data showed inflation pressures rose in the United States in November, further cementing expectations for a hike in interest rates. The euro EUR= lost 0.6 percent to $1.0923. urn:newsml:reuters.com:*:nL1N1441A1