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GLOBAL MARKETS-U.S. 10-year yield at 2-year high, stocks rally

* U.S. 10-year bond yield above 3 percent

* World equities markets rally; U.S., Germany at records

* Turkey's lira hits record low as political crisis deepens

* Yen hits 5-year low; euro rises to 2-year high at $1.3892

By David Gaffen

NEW YORK, Dec 27 (Reuters) - U.S. benchmark government bond yields topped 3 percent on Friday, hitting a two-and-a-half year high, while major global equity markets extended gains to a seventh day in a broad year-end surge.

The yield on the U.S. 10-year Treasury note rose to a high of 3.02 percent, reflecting signs of improvement in the U.S. economy and expectations that the Federal Reserve will steadily withdraw stimulus that kept a lid on interest rates for several years. The yield, which moves inversely to the price of the bond, was at 3.01 percent in late trade.

The latest selloff all but guarantees that this will be one of the worst years ever for the Treasuries market, with the 10-year yield rising 1.25 percentage points in 2013.

"As long as it happens slowly, it's not threatening for other markets. What markets don't want is a sharp move in either direction," said Quincy Krosby, market strategist at Prudential Financial in Newark, New Jersey, which has $1 trillion in assets under management.

Stock markets took the bond selloff in stride. The MSCI World Index rose 0.4 percent, reaching a gain of nearly 20 percent for the year.

"The stock market has clearly discounted what the Fed has said. This is a 'Santa Claus' rally," said Krosby.

Wall Street was little changed after four days of gains for the benchmark S&P 500. Major U.S. stock indexes have set records on a near-daily basis as investors absorb the rise in interest rates, a sign of growing confidence in improved economic demand.

Turkey was again in the spotlight, with the lira hitting a record low and stocks falling to their weakest level in 17 months as a corruption scandal pitting the government against the judiciary took a toll on markets.

The Dow Jones industrial average was down 1.47 points, or 0.01 percent, at 16,478.41. The Standard & Poor's 500 Index was down 0.61 points, or 0.03 percent, at 1,841.41. The Nasdaq Composite Index was down 10.59 points, or 0.25 percent, at 4,156.59. All three indexes rose more than 1 percent on the week.

Strength in equities was evident around the world. In addition to the United States, which is on track for its best year since 1997, Japan's Nikkei stock average is up more than 55 percent so far in 2013, its best annual performance since 1972, driven by that country's aggressive fiscal and monetary stimulus.

"The market feels unstoppable right now with growth coming back, inflation under control and central banks ultra supportive. My main worry is to what extent this is priced into the market already," said Lex van Dam, hedge fund manager at Hampstead Capital.

Germany's DAX gained 0.8 percent on Friday to hit a record, with the index up nearly 26 percent in 2013, following a 29 percent gain in 2012.

Emerging markets have been a noted exception to the equity rally in 2013, with the MSCI EM Index down 5.5 percent this year.


Japan's low-yielding yen extended losses, hitting 105 to the dollar for the first time in five years and a five-year low against the euro, hurt by the renewed appetite for risk. Against the dollar it traded at 105.17.

The euro climbed against the dollar, hitting a peak of $1.3894 according to EBS, the highest since October 2011. It ticked back to about $1.3740, still up 0.4 percent.

Though the euro zone's economic recovery is seen as sluggish, the currency has been underpinned by European banks' repatriation of assets, as well as buying by exporters as the region's current account surplus has increased sharply.

The European Central Bank will take a snapshot of the capital positions of the region's banks at the end of 2013, which it will use in conducting an asset-quality review, or AQR, next year to work out which of them will need fresh funds.

This has led to some demand for euros from banks to help shore up their balance sheets, traders said.

London copper rose to its highest level in four months, with signs of economic revival in Asia and the United States burnishing the demand outlook for metals.

Gold rose to $1,213 in thin holiday trade, but was on track for its biggest annual loss in three decades.

Brent crude oil settled up 20 cents at $112.18 a barrel on Friday. U.S. light sweet crude settled up 77 cents at $100.32 a barrel.