* World stocks rebound after Italy-driven selloff
* Italian bonds, stocks bounce on hope vote may be averted
* Euro off 10-month lows vs dollar; bounces vs yen, franc (Updates to close of U.S. equity market, adds comment)
By Trevor Hunnicutt
NEW YORK, May 30 (Reuters) - Global stocks staged a recovery on Wednesday, buoyed by optimism that Italy may avoid a potentially damaging general election.
MSCI's gauge of stocks across the globe gained 0.67 percent, lifted by a rebound in both Europe and the United States.
The recovery was partly driven by news that Italy's two anti-establishment parties were renewing efforts to form a government, rather than force the country to the polls for the second time this year.
The prospect that no government would be formed, leading to elections that could be a referendum on Italy's euro membership, had sent short-term Italian bond yields up by the most in nearly 26 years.
Yet investors were in a buying mood on Wednesday.
The Dow Jones Industrial Average rose 306.33 points, or 1.26 percent, to 24,667.78, the S&P 500 gained 34.15 points, or 1.27 percent, to 2,724.01 and the Nasdaq Composite added 65.86 points, or 0.89 percent, to 7,462.45.
The pan-European FTSEurofirst 300 index rose 0.23 percent.
"The political problems in Italy heighten the risk of a systematic problem within the euro zone and within the euro zone financial system, but that is still a risk rather than a probability," said Laith Khalaf, senior analyst at Hargreaves Lansdown.
Another positive was a smooth auction of Italian debt that raised 5.57 billion euros, easing concerns about Rome's ability to finance itself.
Japan's biggest private life insurance firm, Nippon Life, which holds some 4.8 trillion yen ($44 billion) worth of euro zone bonds, said it had no plans for now to buy or sell its Italian debt holdings.
Milan-listed equities snapped a five-day losing streak and bounced 2 percent while short-dated Italian bond yields - a sensitive gauge of political risk - fell more than four-tenths a percent from half-decade highs.
Jason Browne, chief investment strategist at FundX Investment Group LLC, said investors were on the look out for news such as the Italian volatility that could point to an end to a bull market led by large tech stocks. But betting against the market usually ended up painfully.
"The bigger picture over the last eight years has really been large-cap U.S. growth dominated, and I think everybody's always looking for a change," he said. "Then we get some news that comes out and we start to see evidence of that change, but each and every time those have tended to be a bit of a pain trade."
Browne said he expects volatility to continue.
The Italian election risk had also sent investors scurrying for safer German and U.S. government bonds, as well as currencies such as the yen and Swiss franc, at the expense of the euro.
That safe-haven trend receded on Wednesday, with the euro bouncing nearly one percent versus the dollar and recouping all its Tuesday losses, which had taken it down to 10-month lows . It also rose against the Swiss franc and yen.
Safe-haven bonds lost some of their appeal, too, after posting the best total returns in about seven years in massive trading the day prior. Benchmark 10-year notes last fell 21/32 in price to yield 2.8423 percent, from 2.768 percent late on Tuesday.
U.S. economic growth slowed slightly more than initially thought, with gross domestic product at a 2.2 percent annual rate in the first quarter, and consumer spending rising at its weakest pace in nearly five years.
Yet U.S. stock investors ignored that and ongoing U.S.-China trade conflict. Energy shares rose as oil prices rebounded after Russia's central bank expressed caution on plans to boost oil supply and analysts forecast a drawdown in U.S. crude inventories.
U.S. crude rose 2.41 percent to $68.34 per barrel and Brent was last at $77.89, up 3.18 percent on the day. The S&P energy index rose 3.11 percent.
The celebratory mood did little to support Asian and emerging markets.
Emerging market stocks lost 1.03 percent. MSCI's broadest index of Asia-Pacific shares outside Japan closed 1.11 percent lower, while Japan's Nikkei lost 1.52 percent.
Reporting by Trevor Hunnicutt Additional reporting by Sujata Rao in London, Tomo Uetake and Hideyuki Sano in Tokyo and Swati Pandey in Sydney Editing by Nick Zieminski and Rosalba O'Brien