(Updates with close of U.S. markets, oil settlement price)
* China, U.S. factory PMIs improve
* European stocks post best daily gain in over a month
* U.S. 3-month and 10-year yield curve steepens above zero
By Chuck Mikolajczak
NEW YORK, April 1 (Reuters) - Global stocks rallied on Monday, kicking off the second quarter on a strong note, as investors cheered upbeat factory activity data in China and the United States and signs of progress on the U.S.-China trade front.
Major U.S. indexes were higher as the S&P 500 expanded on its best first quarter since 1998. Data showed China's manufacturing sector surprisingly returned to growth for the first time in four months in a sign government stimulus measures were taking root.
U.S. data indicated manufacturing activity improved in March while construction spending for February increased. That was enough to overshadow an unexpected drop in February retail sales.
"The Chinese numbers bounced back, and people are taking more risk today because of it," said Michael O'Rourke, chief market strategist at JonesTrading in Greenwich, Connecticut.
European stocks also rallied, notching their best day since Feb. 15, helped by gains in auto shares, on the heels of their best quarterly performance in three years.
The Dow Jones Industrial Average rose 329.67 points, or 1.27 percent, to 26,258.35, the S&P 500 gained 32.79 points, or 1.16 percent, to 2,867.19 and the Nasdaq Composite added 99.59 points, or 1.29 percent, to 7,828.91.
The pan-European STOXX 600 index rose 1.21 percent and MSCI's gauge of stocks across the globe gained 1.10 percent, on track for its best day in about three weeks.
Investors were also encouraged by recent trade developments. China's State Council said on Sunday the country would continue to suspend additional tariffs on U.S. vehicles and auto parts after April 1 in a goodwill gesture following a U.S. decision to delay tariff hikes on Chinese imports.
Recent signals from bond markets have raised warning flags among investors about the possibility of a slowdown in the global economy. Yields on short-dated government bonds in the U.S. had fallen below those of longer-dated bonds, known as yield curve inversion and which has preceded every major recession.
The 3-month-to-10-year yield spread has since pulled back from negative territory and stood around 11 basis points, a two-week high, on the heels of the manufacturing data.
The U.S. Treasury market posted its biggest one-day sell-off in three months on Monday. Benchmark 10-year notes last fell 24/32 in price to yield 2.4991 percent, from 2.414 percent late on Friday.
Still, the retail sales data was weak enough to keep the dollar in check, as the greenback was slightly lower against a basket of major currencies.
The dollar index fell 0.02 percent, with the euro down 0.08 percent to $1.1207.
Sterling was last trading at $1.3114, up 0.63 percent on the day as Parliament will again try to take control of Britain's departure from the European Union. Some lawmakers hope to force Prime Minister Theresa May to drop her Brexit strategy and pursue close economic ties with the bloc.
Oil climbed more than 2 percent, with U.S. crude futures hitting a 2019 high on Monday after tight supply and positive signs for the global economy drove both benchmarks' largest first-quarter gains in nearly a decade.
U.S. crude settled up 2.41 percent at $61.59 per barrel and Brent was settled at $69.01, up 2.12 percent.
Additional reporting by April Joyner in New York Editing by Nick Zieminski and James Dalgleish