* European stocks follow Asia and Wall Street higher
* Dollar rises after U.S. price pressures build
* China shares reach 7-week highs
* Euro zone inflation confirmed in negative territory
By Alistair Smout
LONDON, Oct 16 (Reuters) - World stocks rallied to two-month highs on Friday and the dollar firmed after stronger U.S. economic data helped allay fears about global growth.
The MSCI World Index .WORLD touched its highest level since Aug. 21 as the pan-European FTSEurofirst 300 .FTEU3 rose 0.4 percent, its second day on the up and reversing losses made earlier in the week after disappointing data from China.
The global share index has gained 6 percent so far in October and is set for its best month since 2011 after sharp losses over the summer.
Data from Bank of America/Merrill Lynch showed that equity and bond funds both recorded inflows for first time in 10 weeks, which the bank said signalled a turn in sentiment following several tumultuous months.
U.S. stock futures ESc1 were down 0.1 percent ahead of the cash market open, with investors wary of making big bets either way ahead of Chinese growth data due on Monday.
Asian and European shares tracked Thursday's gains in U.S. stocks, which followed data showing new applications for unemployment benefits fell back to a 42-year low last week. That suggests the U.S. labour market remains strong even though recent jobs data releases have sent mixed signals. ID:nLNNFLEBGZ
Core inflation data also showed some signs that price pressures are beginning to build up again. The Federal Reserve seems to be in no rush to raise U.S. interest rates, however, with policymakers expressing concern that a China-led slowdown in the global economy might pose a threat to the U.S. outlook. ID:nL1N12F21I
"(The employment) report should be reassuring to markets which have been on edge over global disinflation risks," strategists at BNP Paribas (PA:BNPP) said in a note.
"It helps keep the possibility of a move (in interest rates) at the end of this year alive, although our central scenario remains for a delay until at least March 2016."
Rekindled rate-hike expectations lifted the dollar. The dollar index .DXY , which values the greenback against a basket of six major counterparts, was up 0.3 percent at 94.624. ID:nL8N12G0OK
The dollar rose 0.1 percent to buy 118.96 yen JPY= after pulling away from a seven-week trough of 118.065 struck overnight but was still poised to lose 1 percent this week.
The data and the stronger dollar pushed gold off a 3-1/2-month high.
On Wall Street, earnings from the likes of Honeywell HON.N , which beat profit forecasts, were in focus. With 10 percent of S&P 500 companies having reported quarterly earnings, 78 percent have beaten or met expectations, according to Thomson Reuters Starmine data.
Chinese stocks rose to seven-week highs, pushing main indexes to their strongest weekly performance in 4-1/2 months after data showed Chinese loans surged in September. ID:nZZN2RKM00
Investors remained cautious before data on Monday that is forecast to show the world's second-largest economy grew by 6.5 percent in the third quarter, falling below 7 percent for the first time since the global financial crisis. ID:nL3N12C29L
MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS edged 0.2 percent higher and Japan's Nikkei stock index .N225 was up 1.1 percent.
Annual inflation in the euro zone turned negative in September due to sharply lower energy prices, data confirmed on Friday, maintaining pressure on the European Central Bank to increase its asset purchases to boost prices. ID:nL8N12G0U8
The latest Reuters survey of over 60 economists showed euro zone inflation averaging 0.1 percent this year, rising to 1.1 percent in 2016 and 1.6 percent in 2017 -- still below the ECB's target of just under 2 percent. urn:newsml:reuters.com:*:nL9N0WZ019
"The medium-term prognosis is probably as weak as it has been since (ECB President Mario) Draghi started QE," said Simon French, chief economist at Panmure Gordon, adding that recent euro strength had complicated his task further.
The euro was slightly lower at $1.1353 EUR= , down from a seven-week peak of $1.1495 scaled the previous day when ECB governing council member Ewald Nowotny said it was "obvious" the ECB must seek more ways to stimulate the euro zone economy. The euro was on track to end the week effectively flat.
Spain's government bond yields fell as expectations mounted that Moody's will upgrade its credit rating, as Standard & Poor's did on Oct. 2. D:nL8N12G12D
London copper eased from near a one-month peak on Friday as incremental cuts to mine supply failed to revive prices given weak demand. ID:nL3N12G153
Oil prices snapped a week-long decline that pushed prices down nearly 10 percent, with some investors pinning hopes on forecasts of falling U.S. shale oil production. ID:nL3N12G1BU
U.S. crude CLc1 was up 0.8 percent at $46.75 a barrel, after shedding 0.6 percent on Thursday. Brent LCOc1 added 0.5 percent to $49.98.
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http://link.reuters.com/dub25t Currencies vs dollar
http://link.reuters.com/tak27s Commodities performance
http://link.reuters.com/rac73w
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