GLOBAL MARKETS-Bond yields near historic lows; oil, dollar slip

                                
 * Stocks rise before Fed's expected cut in interest rates
                                
 * Dollar index falls versus basket of major currencies
                                
 * Bond yields near historic lows, T-bill rates near zero
                                
 * Oil prices slip as economic troubles dim demand outlook
 (Recasts with U.S. markets, changes byline, dateline; previous
LONDON)
                                
 By Herbert Lash
                                
 NEW YORK, Dec 16 (Reuters) - A record drop in U.S. consumer
prices spurred deflation worries on Tuesday, sending down the
dollar and oil as well as yields on government bonds, with
those for long-dated Treasury debt hovering near historic
lows.
                                
 Rising European and U.S. stocks pared bids for cash and
safe haven investments like U.S. government debt ahead of a
widely expected interest rate cut in the afternoon by Federal
Reserve policy-makers.
                                
 Oil prices slipped as lingering worries about shrinking
global energy demand offset expectations that the Organization
of Petroleum Exporting Countries will agree to cut supply when
members meet on Wednesday in Algeria.
                                
 In the United States, the Fed is widely expected to trim
key short-term rates by at least half a percentage point from
1 percent. The central bank's Federal Open Market Committee
will announce its decision at about 2:15 p.m. (1915 GMT).
                                
 Hopes of more help from the Fed helped lift equity markets,
with major U.S. stock indexes climbing more than 1 percent and
European indices closing up almost 1 percent.
                                
 Government reports again showed the U.S. economy losing
ground, as consumer prices for November plummeted a record 1.7
percent and groundbreaking on new homes fell to a record low.
                                
 "I think we're in a deflationary spiral that will probably
go on until sometime next year," said Thomas di Galoma, head of
U.S. Treasury trading at Jefferies & Co. in New York.
                                
 Benchmark 10-year Treasury notes <US10YT=RR> were up 4/32
in price to yield 2.53 percent, after earlier setting a fresh
five-decade low of 2.47 percent. The 30-year U.S. Treasury bond
<US30YT=RR> briefly hit a historic low of 2.92 percent.
                                
 U.S. and European stocks rose after a smaller-than-feared
loss from Goldman Sachs boosted the beaten-down financial
sector. In Europe BNP Paribas <BNPP.PA> and Axa <AXAF.PA> each
rose about 5 percent, while Dow components JPMorgan <JPM.N> and
Citigroup <C.N> gained 5.2 percent and 6.5 percent.
                                
 Goldman Sachs posted its first quarterly loss since going
public nine years ago, but some investors had expected even
deeper losses and its shares rose 10.8 percent on Wall Street.
                                
 "Everyone had been expecting this to be the proverbial
kitchen sink quarter for Goldman -- they were going to throw as
much of the nonsense as they could possibly find into this
quarter," said Tim Smalls, head of U.S. stock trading at
brokerage firm Execution LLC in Greenwich, Connecticut.
                                
 The Dow Jones industrial average <.DJI> was up 108.96
points, or 1.27 percent, at 8,673.49. The Standard & Poor's 500
Index <.SPX> gained 15.42 points, or 1.78 percent, at 883.99.
The Nasdaq Composite Index <.IXIC> jumped 36.09 points, or 2.39
percent, at 1,544.43.
                                
 The FTSEurofirst 300 <.FTEU3> index of top European shares
closed up 0.9 percent at 834.84 points.
                                
 Defensive stocks were some of the best European gainers,
with Sanofi-Aventis <SASY.PA> up 3.3 percent, the No. 2 boost
to the FTSEurofirst index, and GlaxoSmithKline <GSK.L> up 1.7
percent.
                                
 Electricite de France <EDF.PA> was the top-weighted gainer,
up 3.1 percent after reports said it is close to buying half of
the nuclear assets of Constellation Energy Group <CEG.N> for
$4.5 billion. CEG gained 2 percent.
                                
 "The investment universe is still being driven by the
economic news from the U.S.," said Henk Potts, strategist at
Barclays Stockbrokers in London. "Data continues to disappoint.
Markets are hoping for action from the incoming president,
Barack Obama."
                                
 The dollar fell to a new two-month low against the euro,
spurred by the bleak housing data and expectations the Fed will
cut interest rates.
                                
 The dollar fell against a basket of major currencies, with
the U.S. Dollar Index <.DXY> down 0.75 percent at 81.486.
Against the yen, the dollar <JPY=> fell 0.79 percent at 90.01.
                                
 The euro <EUR=> rose 0.78 percent at $1.3818.
                                
 Many members of OPEC are calling for output cuts of up to 2
million barrels per day, but the potential for deep cuts was
not enough to lift crude prices.
                                
 "The market may be calling OPEC's bluff," said Stephen
Schork, editor at the Schork Report in Philadelphia.
                                
 U.S. light sweet crude oil <CLc1> fell 36 cents to $44.15 a
barrel.
                                
 Spot gold prices <XAU=> fell $1.15 to $837.40 an ounce.
                                
 The MSCI index of Asia-Pacific stocks outside Japan
<.MIAPJ0000PUS> edged up 0.4 percent, but Japan's Nikkei
average <.N225> fell 1.1 percent as the yen's strength against
the dollar hurting shares of exporters.
 (Reporting by Leah Schnurr, Richard Leong, Wanfeng Zhou in New
York and Brian Gorman and David Sheppard in London; Writing by
Herbert Lash, Editing by Chizu Nomiyama)