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LONDON, Mar 13 (Reuters) Stocks rallied on Monday as a fresh wave of takeover activity swept markets while the euro rose on news that the United Arab Emirates is looking to convert more of its foreign exchange reserves to the single currency.

The prospect of higher global interest rates and looming supply weighed on euro zone government bonds but gold rebounded from Friday's two-month low as bargain-hunters and jewellers returned to the market.

Stock investors put aside concerns about slowing profits growth and the negative impact of higher interest rates as takeover fever gripped U.S. and European markets.

U.S. futures were pointing to a stronger start on Wall Street after credit card issuer Capital One Financial Corp. agreed to buy North Fork Bancorp Inc. for $14.6 billion in cash and stock, while McClatchy Co. said it would acquire fellow newspaper publisher Knight-Ridder Inc. in a cash and stock transaction worth $4.5 billion before debt.

The FTSEurofirst 300 Index of European blue-chips climbed 0.5 per cent to 1,361 points, bouncing from last week's 3-week low to approach February's 4-1/2 year high.

''Equity markets were quite rightly nervous when they saw bond yields spiralling up last week and people took some risk off the table,'' said Mark Tinker, head of strategy at broker Execution.

''Then you get a reminder of the intrinsic value in equities from all this takeover activity ... Every sector has potential bid candidates and every sector has got potential bidders in it.'' EXCHANGES, DRUGS AND AIRPORT OPERATORS German drug maker Schering surged more than 20 per cent after domestic rival Merck said it would offer 14.6 billion euros in cash, while the London Stock Exchange spiked 26 per cent after a bid approach from Nasdaq Stock Market on Friday reignited hopes of a takeover battle.

UK airport operator BAA also rose on hopes of a takeover battle after sources said Australia's Macquarie Bank was considering an offer to rival a bid approach from a consortium led by Spain's Ferrovial.

Mobile phone operator Vodafone was another positive influence, jumping 3.2 per cent on hopes of a bidding war for its Japanese business and after a weekend press report suggested it could sell its stake in Verizon Wireless for $40 billion.

In Tokyo, the Nikkei average rose 1.5 per cent to 16,361.5 points, its highest close since Feb. 9 as economic growth data underscored an upbeat outlook for Japan.

Japan's fourth-quarter economic growth was revised to 1.3 per cent, slightly lower than initial estimates, but better than expectations.

Stocks also took heart from stronger-than-expected U.S. payrolls figures on Friday, which suggested the economy there can expand even as rates rise.

EURO GAINS The view that U.S. interest rates will rise above 5 per cent this year lent some support to the dollar but the euro was the big mover on currency markets after UAE's central bank said it was looking to convert up to 10 per cent of its foreign exchange reserves into euros from dollars -- double the target it had previously set.

''Some people are noting the comments from the UAE central governor this weekend that it might be doing reserve shifts from the dollar in to euro,'' said Paul Mackel, FX strategist at ABN AMRO.

''The payrolls report was good, but ... the next 50 basis points is already well priced in to the dollar and nothing is going to change that view,'' he added.

The euro hit a one-week high against the dollar at $1.1970 before easing to $1.1930. The euro also notched up a seven-month high versus sterling and a two-year peak against the Swiss franc.

BONDS STRUGGLE Government bonds struggled as markets continued to adjust to higher expectations for interest rates in Europe, Japan and the U.S.

Benchmark U.S. 10-year yields rose to 4.80 per cent, their highest in more than a year and a half.

Comparable 10-year euro zone government bonds yielded 3.70 per cent, having risen from around 3.42 per cent two weeks ago.

''The market sold off massively recently and it's hard to imagine it will fall much further from here in the near term,'' said a trader at a UK brokerage.

''But again, there's little good news out there for bonds.

Interest rates are rising around the world, and we've got a lot of new supply to digest this week,'' he said.

Italy sold 6.5 billion euros in 5-year and 15-year bonds on Monday, the first sales of around 21 billion euros of debt to be auctioned by euro zone governments this week.

Crude oil dipped below $60 a barrel, extending last week's 6 per cent slide on swelling U.S. inventories and robust OPEC production but gold bounced back to around $544 an ounce after hitting a two-month low on Friday.

REUTERS SD PM1945