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Oil prices, however, continued to climb on worries that unrest in Egypt would trigger regime change across the Middle East and North Africa, driving North Sea Brent crude futures toward a 28-month high.

The dollar fell to three-month lows against a basket of major currencies as the three factors took the steam out of safe-haven buying in the greenback.

MSCI's all-country world stock index, one of the broadest gauges of global equities, was up 0.5 percent having hit levels last seen in August 2008.

Its developed market counterpart gained 0.5 percent to come close to a high last seen in early September 2008.

Emerging markets were up 0.8 percent on the day, but remain down more than 1 percent for the year, reflecting a recent shift by investors from emerging to developed markets.

Stock investors were cheered on Tuesday by strong factory data worldwide, which pushed U.S. benchmark stock indexes to their highest closing levels since June 2008.

Strong earnings from delivery firm UPS Inc and drugmaker Pfizer added to the mood.

"The world economy appears to be improving a little faster than expected, valuations are ok and companies are publishing quite good results," Geert Ruysschaert, strategist at BNP Paribas Fortis Private Banking, said. "So investors can take advantage of that."

The pan-European FTSEurofirst 300 was up 0.4 percent for a near 4 percent year-to-date gain. Earlier, Japan's benchmark Nikkei ended up 1.8 percent for its biggest daily gain since December 2.

Concerns about the political crisis in Egypt, meanwhile, were easing on financial markets after President Hosni Mubarak said he will step down at the end of his term in September, even though protestors continue to demand an immediate end to his 30-year rule.

Foreign investors have begun to show renewed interest in Egyptian bonds and stocks and the cost of insuring Egyptian debt against default fell.

DOLLAR AT LOWS

The dollar was at 12-week lows with expectations of loose U.S. monetary policy further encouraging risk-taking and as concerns over euro zone peripheral debt seemed to be contained.

"The dollar is weak due to the huge U.S. deficit, no yield and a very dovish central bank," said Ray Farris, currency strategist at Credit Suisse.

Panasonic, the world's fourth-largest TV maker after Samsung Electronics, LG Electronics and Sony Corp, is struggling to catch up in smartphones and tablets, a market dominated by Apple Inc and with Samsung emerging as a key rival.

Investors are eyeing Panasonic's ability to restructure quickly and show benefits after its deal with Sanyo Electric, which is aimed at sharpening the company's focus on environmental technologies like solar power systems and rechargeable batteries.

The company is expected to provide an update on integration plans later this year.

Panasonic reported an operating profit of 95.36 billion yen ($1.17 billion) for October-December, lagging the average forecast of 109.1 billion yen from a poll of six analysts by Thomson Reuters I/B/E/S.

The maker of Viera TVs and Lumix cameras left its full-year profit outlook at 310 billion yen, compared with a consensus of 328 billion yen in a poll of 20 analysts. Operating profit for the year to March 2010 was 190 billion yen.

Panasonic shares have fallen nearly 30 percent from a 14-month high of 1,585 yen reached in January last year, compared with a 5 percent fall in the Nikkei average.

(Reporting by Isabel Reynolds; Editing by Michael Watson)

The struggling chain, which operates, 500 stores, will likely close at least 150 stores, according to a separate report by Bloomberg News.

Several private equity investors are considering whether to provide a junior loan to the company, according to the report.

Bloomberg cited unidentified sources for its story.

Borders said on Sunday it would seek to preserve cash by delaying its January payments to vendors and landlords as it tries to complete a debt restructuring.

Borders last week secured a $550 million credit facility from GE Capital, a unit of General Electric Co, under several conditions, including that it close stores and arrange financings with other lenders, vendors and landlords.

It also warned it might have to file for Chapter 11 bankruptcy if it failed to meet those conditions.

Analysts have faulted Borders for being ill equipped to adapt to bookbuyers' migration to digital formats and for having too many stores in an age when many shoppers prefer to buy even paper books on line from retailers like Amazon.com Inc

The chain operates 500 namesake superstores in addition to the smaller Waldenbooks chain. About three-quarter of its superstore leases expire in 2017 and beyond, according to a regulatory filing.

Borders is late comer to the ebooks market, a rare source of growth in the publishing world, launching its ebook store eight months after its larger rival, Barnes & Noble Inc, and nearly three years after Amazon.com.

Sales at stores open at least a year have plunged in recent years, with overall company sales down 37.3 percent in the last three years.

Borders did not immediately return several calls for comment.

Its shares fell 35.6 pct to 47 cents in regular trading on the New York Stock Exchange on Tuesday.

After hours, shares fell further to 38 cents. They hit an all time low of 35 cents in December 2008.

(Reporting by Tom Hals; additional reporting by Phil Wahba in New York; Editing by Steve Orlofsky)

The stronger U.S. auto sales results pointed to a recovery in American consumer demand and a return of easier lending terms by banks, auto executives and analysts said, despite the threat of higher oil prices ahead.

Meanwhile, major automakers reported a strong start to 2011 outside the United States, soothing concerns about slower demand in growth-engine markets like India and a bumpy recovery in the developed markets of Europe.

The major risk, analysts said, remains the prospect that higher oil prices could crimp demand or send consumers scrambling toward the kinds of small vehicles that are typically less profitable for automakers.

"We're still not at the oil prices that would tilt the industry," said Nationwide chief economist Paul Ballew. "If oil prices don't trip us up, Detroit should have a pretty good year."

GM posted a 22 percent sales gain, pushing its market share above 20 percent.

It was the first time the top U.S. automaker had taken market share in six months and came along with a jump in sales of pickup trucks and SUVs, the heavy vehicles that remain GM's bread and butter.

GM's sales gain came as it stepped up spending on incentives to lure consumers, although the automaker vowed that it would not return to its much-criticized practice of buying market share with zero-percent financing and other discounts that undercut the resale value of its cars.

"We're not going to return to the days of driving production with incentives. We know that's not going to be a recipe for success for us," GM's sales chief, Don Johnson, told reporters and analysts.

Chrysler, which is pushing toward an initial public offering of stock in the second half of 2011, had a 23 percent sales gain.

Other major automakers trailed with double-digit sales gains: Toyota Motor Co gained 17 percent; Honda Motor Co and Nissan Motor Co were up 15 percent; Ford Motor Co gained 13 percent.

(Additional reporting by Gilles Guillaume in Paris, Hyunjoo Jin in Seoul and Sumeet Chatterjee in Mumbai; writing by Kevin Krolicki; Editing by Vinu Pilakkott, Andrew Callus and Matthew Lewis)

The Institute for Supply Management's monthly manufacturing survey fits into a pattern of steadily improving data and comes ahead of Friday's closely watched U.S. payrolls report expected to show the U.S. economy added jobs for a fourth straight month.

The ISM manufacturing index climbed to 60.8 in January, the highest reading since May 2004 and well above analysts expectations. A reading above 50 indicates expansion.

The ISM's employment index reached its highest level since April 1973, although that wont necessarily equate to higher levels of hiring in the near term.

"I still would caution that the employment number is more about the willingness to hire, rather than an increase in the absolute numbers," said Norbert Ore, chair of the ISM manufacturing business survey committee in Atlanta, Georgia.

"At the end of the day it doesn't equate to a large number of jobs," he said.

The prices paid component of the index jumped to 81.5 from 72.5 the prior month and coincided with signs of rising inflation around the globe as firms ramp up production.

"It's a good number," said Gary Thayer, chief macroeconomic strategist at Wells Fargo Advisors in St. Louis, Missouri. "Manufacturing is outperforming other parts of the economy, but we're also seeing some inflationary seeds in costs rising.

Inflation-sensitive U.S. Treasury debt prices extended losses after the data, while the S&P 500 stock index climbed more than 1 percent.

Underscoring the uneven nature of the recovery, however, a separate report from the U.S. Commerce Department showed construction spending fell in December to its lowest level in more than 10 years as housing continues to struggle.

The Federal Reserve has argued that continued asset purchases are needed under its $600 billion program in order to support an economy that, while showing signs of improvement, is still far from full health.

The Commerce Department said on Tuesday U.S. construction spending dropped 2.5 percent to an annual rate of $787.9 billion, the lowest level since July 2000.

The most recent gross domestic product growth figures showed the U.S. economy gathered speed in the fourth quarter to regain its pre-recession peak with a big gain in consumer spending and strong exports.

The economy grew at a 3.2 percent annual rate in the final three months of 2010 after expanding at a 2.6 percent pace in the third quarter, the Commerce Department said on Friday.

(Additional reporting by Ellen Freilich; Editing by Padraic Cassidy)