* World stocks up 2.7 percent for the week
* Euro rallies after post-ECB swings
* MSCI up nearly 4 percent in month after U.S. election
* Japan's Nikkei posts highest closing level of the year
By Alistair Smout
LONDON, Dec 9 (Reuters) - World stocks were set for a weekly gain and held near 16-month highs on Friday, while the euro steadied after swings following the European Central Bank's decision to extend its stimulus programme.
The MSCI World index .WORLD was up 0.1 percent, on track for a gain of 2.7 percent for the week. The index was just 0.1 percent below Thursday's peak, which was its highest level since August 2015.
European shares hit their highest level for 11 months, and were set for their best week since February, following the ECB's decision to trim the size of its asset purchase program while also extending it for longer than many analysts had expected.
The ECB said it would reduce its monthly asset buys to 60 billion euros ($63.68 billion) as of April, from the current 80 billion euros, and extend purchases to December from March - three months longer than what some analysts had forecast. dragged down two-year yields across Europe and sharply steepened the yield curve, a gift for banks that typically borrow short maturities and lend long.
European bank stocks .SX7P pulled back on Friday, dropping 1 percent, but were still up 9.2 percent for the week, with the sector set for its biggest weekly rise since December 2011.
One month on from November's U.S. presidential election, world stocks have gained 3.8 percent, with Wall Street spurred to all time highs on hopes of higher growth and inflation as a result of President-elect Donald Trump's planned fiscal stimulus.
Analysts said that signs the ECB would continue to provide monetary support for as long as needed complemented the promise of fiscal stimulus in a welcome cocktail for investors.
"Markets already excited by the prospect of a fiscal stimulus wave via a Trump election look in-line to get more of both fiscal and monetary stimulus from next year," said Mike van Dulken, head of research at Accendo Markets.
"(That's) the best of both worlds for investors."
In all, Europe's STOXX 600 .STOXX was up 0.1 percent.
The euro recovered a foothold on Friday, after an extension of the European Central Bank's programme of money-printing till the end of next year drove its biggest daily loss against the dollar since Britain's vote to leave the European Union in June. was flat against the dollar EUR= , spiking as high $1.0875 on Thursday before tumbling as ECB President Mario Draghi said the unexpected move was not an outright winding-down of the central bank's quantitative easing (QE) program, and the central bank reserved the right to increase the size of purchases again if the euro zone economy falters.
The dovish tone of the ECB also saw a fall in euro zone borrowing costs, led by Southern Europe. ECB's bond purchase changes came less than a week before the Federal Reserve's policy meeting next Tuesday and Wednesday.
Interest rate futures FFZ6 , FFM7 implied traders saw a 98 percent chance the U.S. central bank would raise interest rates by a quarter point next week, and about a 50 percent chance it would raise rates by at least another quarter point by June 2017, according to CME Group's FedWatch program.
The dollar index, which tracks the greenback against a basket of six major rival currencies, was steady on the day at 101.13 .DXY , up 0.4 percent for the week.
The dollar was up 0.4 percent at 114.42 yen JPY= , moving back toward last week's 10-month high of 114.83 yen.
Asian shares edged down on Friday but were on track for weekly gains. MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS dipped 0.2 percent, and was poised for a weekly gain of 2 percent.
Japan's Nikkei stock index .N225 ended 1.2 percent up at its highest closing level since December 2015. The Nikkei earlier topped the 19,000-level for the first time in a year, as investors saw both the weak yen and prospects of U.S. President-elect Donald Trump adopting reflationary policies benefiting Japan's major exporters.
"The U.S. market's strength is giving a boost to Japanese shares," said Eiji Kinouchi, chief technical analyst at Daiwa Securities.
Oil built on its gains after rebounding overnight on growing optimism that non-OPEC producers might follow the cartel's lead by agreeing to cut output. O/R
U.S. crude CLc1 added 0.9 percent to $51.31 a barrel. Brent crude LCOc1 rose 0.7 percent to $54.24.
Spot gold XAU= was flat at $1,170.4 an ounce and was set for a weekly decline of about 0.5 percent, pressured by the stronger U.S. dollar and expectations that the Fed will raise interest rates next week.