* Dollar gains; oil remains weak
* Empire State manufacturing way below expectations
* U.S. stocks rebound from sluggish start
* U.S. housing index hits 8-1/2-year high (Adds close of U.S. markets)
By Chuck Mikolajczak
NEW YORK, Aug 17 (Reuters) - World equity indexes advanced modestly on Monday as upbeat U.S. housing data helped Wall Street shrug off a weak manufacturing report, while the prospect of higher U.S. interest rates lifted the dollar for a third day.
U.S. equities rebounded as a report showed that U.S. homebuilder sentiment rose in August to its highest level in nearly a decade. ID:nL3N10S4N5
Earlier in the session, stocks had dropped as Empire State data showed August manufacturing activity in New York was at its weakest in years. ID:nL1N10S0J8
"The housing data was pretty good," said Michael James, managing director of equity trading at Wedbush Securities in Los Angeles. "It certainly didn't hurt the bullish tone to everything housing-related."
Minutes from the U.S. Federal Reserve's most recent policymaking meeting are due to be released on Wednesday. Investors await that document for clues on how soon the Fed may hike rates for the first time in nearly 10 years, with many analysts expecting such a move by the end of the year.
The expectations for an impending rate hike helped the dollar rise, as did reassurance from China fixing its yuan exchange rate slightly higher for a second straight day. The dollar index .DXY was up 0.3 percent. ID:nL5N10S21T
Housing stocks advanced after the NAHB/Wells Fargo Housing Market index showed U.S. homebuilder sentiment rose in August to its highest since a matching reading almost a decade ago. The PHLX housing sector index .HGX touched an 8-1/2 year high of 248.03 and closed up 1.2 percent at 248.01.
REBOUND
European stocks bounced from last week's heavy selloff of nearly 3 percent, with the pan-European FTSEurofirst 300 index .FTEU3 closing up 0.25 percent.
MSCI's all-country world stock index .MIWD00000PUS edged up 0.16 percent.
Crude oil remained near 6-1/2 year lows, as U.S. crude CLc1 settled down 1.5 percent at $41.87, while Brent LCOc1 settled down 0.9 percent to $48.74, after data indicated Japan's economy contracted in the second quarter amid oversupply concerns. ID:nL3N10S05C
The Dow Jones industrial average .DJI rose 67.78 points, or 0.39 percent, to 17,545.18, the S&P 500 .SPX gained 10.9 points, or 0.52 percent, to 2,102.44 and the Nasdaq Composite .IXIC added 43.46 points, or 0.86 percent, to 5,091.70.
Germany's DAX lost 0.4 percent .GDAXI and France's CAC 40 climbed 0.6 percent .FCHI . Britain's FTSE 100 .FTSE was flat, ending 0.01 percent lower.
The yuan fell more than 4 percent at one point last week, pulling down riskier assets, including emerging currencies globally on fears of a currency war. But China slowed the pace of the currency's drop and on Monday fixed it higher for the second day in a row. ID:nL3N10S1EH
Benchmark 10-year notes US10YT=RR were last up 8/32 in price to yield 2.1695 percent from 2.198 late on Friday. ID:nL1N10S0ZL