NEW YORK (Reuters) - World stocks jumped off multi-year lows yesterday as hopes of recovery in China and plans by its government to increase spending also helped trigger a surge in oil and metals prices.

Crude prices settled nearly nine percent higher after Chinese manufacturing in February rose for a third straight month and US data showed an unexpected drop in crude stockpiles last week as gasoline demand also increased.

The dollar climbed four-month peaks against the yen as the news out of China, including plans to increase infrastructure and manufacturing spending, revived investors' risk appetite.

US government debt prices fell as a rebound of more than two percent in the three major US stock indexes dampened the appeal of fixed-income assets. Concerns about ballooning bond issuance also weighed on Treasuries.

The slide in government debt prices was somewhat surprising as investors appeared to ignore the loss of almost 700,000 jobs in February, data that normally sends bonds higher.

The five-month high in Chinese manufacturing raised hopes that China, a major driver of global growth, may be on the brink of economic recovery.

Copper for May delivery rose 5.6 percent on a drop in inventories and the spending plans in China, the world's biggest consumer of the metal.

The Shanghai Composite Index , the main Chinese stock index, surged 6.1 percent in its biggest gain since November.

"The biggest news today came out of China and that seems to have a bigger impact on risk appetite than market activity," said Robert Blake, senior currency strategist at State Street Global Markets in Boston.

US stocks snapped a five-day sell-off that had pushed the leading indexes to 12-year lows.

The Dow Jones industrial average closed up 149.82 points, or 2.23 percent, at 6,875.84.

The Standard & Poor's 500 Index rose 16.54 points, or 2.38 percent, to 712.87. The Nasdaq Composite Index climbed 32.73 points, or 2.48 percent, to 1,353.74.

Both Dow component Caterpillar Inc, a big exporter to China and a major seller of equipment to the mining industry, and miner Freeport-McMoRan Copper & Gold Inc finished yesterday's session with 13 percent gains.

European shares rallied, breaking three straight sessions of losses as higher oil and other commodity prices - driven by China hopes - spurred investors to buy energy and natural resource stocks.

"The market is encouraged by the news from China," said Joe Arsenio, president of Arsenio Capital Management in Larkspur, California. "They believe (China) will gain traction in the second quarter."

The FTSEurofirst 300 index of top European shares closed at 696.23 points, up four percent.

The rise in equity markets around the world overshadowed more dire economic data suggesting that the US and euro-zone recessions have yet to hit bottom.

US private companies hemorrhaged 697,000 jobs in February and the slump in the service sector deepened .

The dollar vaulted to a four-month high against the yen as another slide in US payrolls and persistent worries about the world economy boosted safe-haven flows into the US currency.

The dollar rose as high as 99.49 yen, closing in on 100 for the first time since early November. In late New York trading, the dollar was up 0.75 percent at 99.04 yen.

The dollar fell against a basket of major currencies, with the US Dollar Index down 0.84 percent at 88.439. The euro rose 0.57 percent to $1.2637.

US government debt fell. The benchmark 10-year US Treasury note slid 28/32 in price to yield 2.99 percent. The two-year US Treasury note shed 5/32 in price to yield 0.96 percent.

US crude oil futures for April delivery gained $3.73 higher, or 8.96 percent, to settle at $45.38 a barrel.

London Brent crude rose $2.42 to settle at $46.12 a barrel.

Gold for April delivery fell $6.90 to settle at $906.70 an ounce in New York.