* European stocks finish higher
* Yields fall on weak inflation data
* Dollar pares gains after data
* Oil rises, gasoline jumps 10 pct as U.S. refineries reel (Updates to afternoon U.S. trading)
By Saqib Iqbal Ahmed
NEW YORK, Aug 31 (Reuters) - U.S. stocks rose and Treasury prices gained slightly on Thursday after data showed U.S. inflation increased at its slowest pace since late 2015, boosting expectations that the Federal Reserve will hold off from increasing interest rates again this year.
The dollar gave up early gains against a basket of major currencies, and gold prices rose as simmering tensions on the Korean peninsula supported sentiment.
U.S. consumer spending rose slightly less than expected in July and annual inflation increased at its slowest pace since late 2015. Investors' focus will then turn to the monthly U.S. payrolls report, to be released on Friday.
"The outlook for the U.S. and the global economy remains relatively positive and most investors do not see a recession ahead," said Michael Sheldon, chief investment officer of RDM Financial Group at HighTower.
"Given that backdrop, equity markets are likely to grind higher over the next few quarters and pullbacks are likely to be bought by investors."
U.S. stocks extended gains after U.S. Treasury Secretary Steven Mnuchin said President Donald Trump's administration has a detailed plan on tax reform and is still on track to execute the agenda by the end of this year.
"Even if investors aren't taking him at his word they expect him to do all he can. This is a market that has heard tax reform so often. It wants to see if they can deliver," said Quincy Krosby, chief market strategist at Prudential Financial in Newark, New Jersey.
MSCI's world index, which tracks shares in 46 countries, was up 0.6 percent, and touched a three week high.
The Dow Jones Industrial Average rose 59.76 points, or 0.27 percent, to 21,952.19, the S&P 500 gained 14.06 points, or 0.57 percent, to 2,471.65 and the Nasdaq Composite added 57.33 points, or 0.9 percent, to 6,425.64.
European stocks rallied after Reuters reported that the euro's rapid gains are worrying a growing number of European Central Bank policymakers, raising the chance asset purchases will be phased out only slowly. The pan-European STOXX 600 closed up 0.77 percent.
The euro, which hit a more than 2-1/2-year high against the dollar on Tuesday, slipped on the Reuters report, before recovering to trade up 0.18 percent at $1.1902.
The dollar index, which measures the greenback against a basket of six major rivals, weakened after the U.S. inflation data. The index was 0.21 percent lower on the day at 92.686, having risen as high as 93.347.
The weaker dollar and continued security concerns related to North Korea helped gold prices rise. Spot gold was up 0.83 percent at $1,319.22 an ounce.
In the bond market, benchmark 10-year U.S. Treasury notes were up 4/32 in price to yield 2.133 percent, down from 2.145 percent on Wednesday.
Trading volumes were relatively low, however, with some investors reluctant to buy Treasuries given yields are near their lowest since November.
Gasoline futures surged 13.5 percent as almost a quarter of U.S. refining capacity remained offline due to Tropical Storm Harvey and traders scrambled to reroute millions of barrels of fuel.
U.S. crude settled up $1.27 or 2.76 percent, at $47.23 a barrel and Brent traded up $1.45 or 2.85 percent at $52.31
Reporting by Saqib Iqbal Ahmed; Additional reporting by Karen Brettell and Sam Forgione in New York and Sruthi Shankar and Tanya Agrawal in Bengaluru; Editing by James Dalgleish