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GN: GLOBAL MARKETS-Stocks rally on Wells-Wachovia deal, dollar gains
 
*Global stocks rally, dollar gains on European weakness
*U.S. House of Representatives starts vote on bailout
*Wells Fargo buying Wachovia for $16 bln
*U.S. job rolls suffer deepest cut in 5-1/2 years in Sept (Releads, updates Wells-Wachovia deal, prices, US data)
By Daniel Bases
NEW YORK, Oct 3 (Reuters) - The purchase of troubled bank Wachovia Corp by Wells Fargo and the anticipated passage of a $700 billion U.S. financial rescue package set off a rally in global stock markets on Friday as investors shrugged off the biggest drop in U.S. payrolls in 5-1/2 years.
The worse-than-expected September jobs report and data showing weak growth in the dominant U.S. service sector last month could tip the balance in favor of the U.S. House of Representatives passing the historic package.
"There's no doubt that the huge market decline on Monday caused fear in lawmakers. The bad economic data we've been getting has made House members realize that things are already very bad and could get much worse," said John Praveen, chief investment strategist at Prudential International Investments Advisers in Newark, New Jersey.
"I think they're more inclined to vote yes this time. There's a realization that this is not a Wall Street bailout but a Main Street rescue," he said.
An earlier attempted to pass the bill meant to underpin banks and other financial firms staining under bad mortgage-related assets failed on Monday, sending stocks careening lower.
A deteriorating financial backdrop in Europe is giving a sustained lift to the U.S. dollar even as America's economy is working its way through the financial turmoil and economic slowdown.
It was Wells Fargo's offer to buy Wachovia in a deal valued at roughly $16 billion that set alight stocks in Europe and the United States. Asia's main stock markets had closed with losses before the deal was announced.
The banking merger news gave a shot of optimism to investors that business was still getting done in the financial industry. Wells Fargo's deal scuttled Citigroup's attempt to buy Wachovia's banking assets for $2.16 billion in a government brokered deal.
In stocks, the benchmark Dow Jones industrial average was up 213.93 points, or 2.04 percent, at 10,696.78. The Standard & Poor's 500 Index was up 28.55 points, or 2.56 percent, at 1,142.83. The Nasdaq Composite Index was up 53.33 points, or 2.70 percent, at 2,030.05.
European share prices closed with solid gains. The FTSEurofirst 300 index closed up 3.01 percent on the day. On the week, the index lost 1.4 percent. MSCI's main world equity index erased earlier losses to rise 1.66 percent.
Japan's Nikkei 225 index fell 1.9 percent to a three-year closing low on Friday for its worst week in more than a year.
GRIM ECONOMIC DATA
As the world has focused on events in the U.S. Congress, America's economy is showing more signs of a slowdown.
On Friday the Labor Department reported a loss of 159,000 non-farm jobs last month. Employment contracted for a ninth straight month, even before the labor market experienced the full shock from September's series of bank troubles. The unemployment rate held at a five-year high of 6.1 percent.
"We've seen weaker data in history, but these look pretty decisively to be the beginning of something worse," said Pierre Ellis, senior economist at Decision Economics Inc in New York.
A second gloomy piece of economic data showed America's dominant service sector economy barely grew in September.
The Institute for Supply Management's non-manufacturing index came in at 50.2, marginally above the level of 50 that signals expansion, with the help of a slight rise in new orders. The index was 50.6 in August.
Government bonds, which usually benefit from grim economic data were overtaken by events and fell as stock prices rose.
Benchmark 10-year U.S. Treasuries fell nearly 1 point in price, pushing the yield up to 3.74 percent.
U.S. rate futures nearly price in a 50 basis point cut to the Oct 28-29 Federal Open Market Committee meeting, to 1.5 percent. Expectations has slipped a bit since late Thursday.
Euro zone government bond gains were wiped out by the stock market rally. The two-year Schatz yield was up 1.1 basis points at 3.321 percent.
DOLLAR RALLY
The U.S. dollar remained on track for its best weekly gain against a basket of currencies in 16 years on Friday while its performance against the euro this week could be the best since its creation after the European Central Bank opened to the door to interest rate cuts on Thursday.
ECB President Jean Claude Trichet said inflation risks have eased as financial market turbulence hit the euro zone economy. A cut in Europe's benchmark interest rate would erode the attractiveness of the euro, which fell 0.08 percent at $1.3805 from a previous session close of $1.3816.
The U.S. Dollar Index is up 0.03 percent, holding near a one-year high against a basket of major currencies,
Emerging sovereign spreads narrowed 7 basis points while emerging stocks lost 0.93 percent, rising from an earlier two-year low.
Gold prices fell $1 or 0.12 percent to $834 an ounce.
U.S. light crude rose $0.78 to $94.75 a barrel. (Additional reporting by Ellis Mnyandu, John Parry, Nick Olivari in New York; Ros Krasny in Chicago; Glenn Somerville in Washington; Natsuko Waki, George Matlock in London)
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