(Updates to U.S. mid-afternoon, updates comments)
* MSCI World Equity index hits 2-1/2-week high
* Dollar skids on bets of U.S. rate pause; gold rises
* China-U.S. tariff talks resume
By Saqib Iqbal Ahmed
NEW YORK, Jan 7 (Reuters) - An index of world stocks rose on Monday, adding to Friday's strong gains, on optimism about the outcome of trade talks between Washington and Beijing.
Growing bets the Federal Reserve will halt its multi-year rate-hike cycle sent the dollar lower across the board, while rising equity markets and support from OPEC production cuts helped lift oil prices.
MSCI's world equity index, which tracks shares in 47 countries, was up 1.05 percent, its highest level since Dec. 19.
On Wall Street, the resumption of U.S.-China trade talks helped eased concerns about the fallout from an extended trade war between the world's two largest economies. Technology and consumer discretionary shares led gains.
U.S. officials are meeting their counterparts in Beijing this week for the first face-to-face talks since U.S. President Donald Trump and Chinese President Xi Jinping agreed in December to a 90-day truce in a trade war that has roiled global markets.
U.S. Commerce Secretary Wilbur Ross predicted on Monday that Beijing and Washington could reach a trade deal that "we can live with."
"The main thing is the administration's implied progress on talks with China. That's something that the market sees as very important," said Rick Meckler, partner at Cherry Lane Investments in New Vernon, New Jersey.
The Dow Jones Industrial Average rose 165.54 points, or 0.71 percent, to 23,598.7, the S&P 500 gained 25.38 points, or 1.00 percent, to 2,557.32, and the Nasdaq Composite added 94.63 points, or 1.4 percent, to 6,833.48.
The gains extended Friday's rise following robust U.S. employment data and a message from the Federal Reserve that it would be patient and flexible in policy decisions this year.
On Friday, Fed Chairman Jerome Powell told the American Economic Association that the U.S. central bank is not on a preset path of interest rate hikes and that it will be sensitive to the downside risks markets are pricing in.
European shares edged lower on Monday amid lingering worries about the euro zone economy and Brexit. The pan-European STOXX 600 finished down 0.15 percent.
In currency markets, the dollar index, which tracks the greenback versus the euro, yen, sterling and three other currencies, was down 0.54 percent at 95.66 amid the diminished expectations for further U.S. rate hikes.
"Fed Chair Powell's comments Friday that policymakers were flexible and 'listening carefully' to financial markets helped support the impression that the Fed tightening cycle may slow or pause in the coming months," said Shaun Osborne, chief FX strategist at Scotiabank in Toronto.
Interest rate futures traders are now pricing in a chance of a small rate cut this year, while the Fed has indicated that two rate hikes are likely.
Gold rose and palladium hit a record high as the weaker dollar spurred demand for the metals from holders of other currencies. Spot gold was up 0.25 percent at $1,288.02 per ounce.
U.S. Treasury prices erased early gains after a private report released on Monday showed growth of U.S. services industries slowed to a five-month low in December, signaling the world's largest economy is decelerating faster than economists' have forecast.
Benchmark 10-year notes shed 7/32 in price to yield 2.6818 percent, from 2.659 percent on Friday.
Stable equity markets and production cuts by the Organization of the Petroleum Exporting Countries helped oil prices rise for a fifth straight session.
Brent crude oil settled up 27 cents at $57.33 a barrel. U.S. crude settled up 56 cents at $48.52 a barrel. (Reporting by Saqib Iqbal Ahmed; Additional reporting by Gertrude Chavez-Dreyfuss in New York and Sruthi Shankar in Bengaluru Editing by Susan Thomas and Leslie Adler)