GLOBAL MARKETS-Stocks rise, debt falls on Fed liquidity move

                                
 (Recasts with U.S. markets, changes byline and dateline;
previous LONDON)
                                
 By Herbert Lash
                                
 NEW YORK, Oct 7 (Reuters) - U.S. and European share prices
initially rallied and the euro rose against the dollar on
Tuesday after the Federal Reserve took a step to thaw the
frozen commercial paper market and restore confidence among
panicky investors around the world.
                                
 Oil prices rose more than $5 a barrel after Australia's
central bank surprised the market with its biggest interest
rate cut in 16 years, raising hopes other countries would
follow suit to bolster growth, which would boost energy
demand.
                                
 U.S. government debt prices fell sharply after the Fed's
announcement it would create a facility to buy commercial
paper, in a move to help a market that is widely used by many
companies to fund day-to-day business operations.
                                
 The action knocked out any safe-haven bids for short-term
government debt.
                                
 The 10-year U.S. Treasury note <US10YT=RR> traded 26/32
lower in price to yield 3.56 percent, up from 3.46 percent late
on Monday, while the 2-year Treasury note <US2YT=RR> was 7/32
lower in price to yield 1.55 percent, up from 1.44 percent.
                                
 U.S. stocks opened higher and European shares extended
gains on news of the facility, seen as yet another emergency
move by U.S. authorities aimed at calming chaotic financial
markets.
                                
 But U.S. and European stocks gave up much of their early
gains.
                                
 At 10 a.m., the Dow Jones industrial average <.DJI> was up
38.23 points, or 0.38 percent, at 9,993.73. The Standard &
Poor's 500 Index <.SPX> was up 2.76 points, or 0.26 percent, at
1,059.65. The Nasdaq Composite Index <.IXIC> was down 2.36
points, or 0.13 percent, at 1,860.60.
                                
 In Europe, the FTSEurofirst 300 <.FTEU3> of top European
companies was up 1 percent at 1,015.04 points, trimming gains
that had earlier pushed the index more than 2 percent higher.
                                
 In the currency market the euro extended gains, rising as
much as 3 percent against the yen as the Fed's move boosted
risk appetite.
                                
 "The Fed announcement to act as a backstop in the CP market
is likely to have a positive reaction in regard to sentiment,"
said Dustin Reid, senior currency strategist, at RBS Greenwich
Capital. "In terms of FX, it should help risk appetite on the
margin."
                                
 The dollar fell against a basket of major currencies, with
the U.S. Dollar Index <.DXY> down 1.03 percent at 80.837. But
it was higher against the yen, last trading at 102.57 yen
<JPY=>, up 0.7 percent on the day.
                                
 The euro <EUR=> rose 1.43 percent against the dollar to
$1.3681.
                                
 U.S. light sweet crude oil <CLc1> rose $2.74 to $90.55 a
barrel.
                                
 Spot gold prices <XAU=> rose $18.65 to $876.10 an ounce.
                                
 Overnight in Asia, stocks outside Japan rose for the first
time in four days. Japan's Nikkei share average <.N225>
finished down 2.2 percent at a five-year low, but MSCI's index
of Asia-Pacific stocks outside of Japan <.MIAPJ0000PUS> rose
1.5 percent, rebounding from a low last seen in December 2005.
 (Reporting by Kristina Cooke, Chris Reese, Wanfeng Zhou and
Steven C. Johnson in New York and Alex Lawler in London,
Editing by Chizu Nomiyama)