GLOBAL MARKETS-Stocks, dollar gain on soft landing hopes

(Adds gold, oil settlement prices, comment)

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U.S. economic growth beats expectations

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Solid GDP data offsets signs of economic weakness

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Oil prices firm on China demand optimism

By Herbert Lash and Huw Jones

NEW YORK/LONDON, Jan 26 (Reuters) - Global stock markets rallied and the dollar strengthened on Thursday after a slew of data showed a strong U.S. economy that is decelerating with slowing inflation, giving credence to the Federal Reserve's desire to engineer a soft landing.

Gross domestic product increased at a faster-than-expected 2.9% annual rate in the fourth quarter of last year as consumers boosted spending on goods, the U.S. Commerce Department said.

Inflation data improved too, as growth in personal consumption expenditures slowed to 2.1% year over year from 2.3% in the prior quarter while the GDP price index, another inflation measure, decelerated to 3.5%.

But the Fed's hefty interest rate hikes eroded demand and slowed growth toward the end of 2022, posing a conundrum for the U.S. central bank's policymakers as they contemplate how much higher rates need to go when they meet next week.

MSCI's all-country world index, a gauge of stocks in 47 countries, rose 0.62% to hit a fresh five-month high, while the dollar index rose 0.325%.

"The market is pricing in a Fed pivot where they actually cut rates by the end of the year," said James Ragan, director of wealth management research at DA Davidson in Seattle, saying Fed Chair Jerome Powell is unlikely to indicate any move next week.

"What Powell has pushed back on a lot is to not really think about lowering rates at all," Ragan said. "But they are willing to pause and hold rates at a high level for a certain period of time."

Futures are pricing a 95.8% probability of a 25 basis points hike next Wednesday, and see the Fed's overnight rate at% by December, less than than the 5.1% rate Fed officials have projected into next year

Treasury yields rose as the resilient economy strengthened the case for the Fed to maintain its hawkish stance in coming months as it seeks to cool inflation.

The yield on 10-year Treasury notes was up 3.3 basis points to 3.495% and the gap between yields on three-month Treasury bills and 10-year notes, seen as a recession harbinger, narrowed to -117.6 basis points.

"On balance, the data being better than expected suggests there's more resilience in the economy than many have given it credit," said Joe Manimbo, senior market analyst at Convera in Washington. "The fact that inflation figures in the Q4 data moderated suggests it's a Goldilocks scenario."

The Dow Jones Industrial Average rose 0.31%, the S&P 500 gained 0.70% and the Nasdaq Composite added 1.24%. In Europe, the broad STOXX 600 index closed up 0.42%.

Overnight in Asia, equities rose to a seven-month high, with Hong Kong shares playing catchup to other markets' gains as trade resumed after a three-day Lunar New Year holiday.

MSCI's broadest index of Asia-Pacific shares outside Japan climbed 1.1% and was set for its fifth straight day of gains.

Oil prices rose more than 1% on Thursday on expectations demand will strengthen as top oil importer China reopens its economy and on positive U.S. economic data.

U.S. crude futures settled up 86 cents at $81.01 a barrel, and Brent rose $1.35 to settle at $87.47.

Gold edged down after the strong U.S. data. Indications of a likely slowdown limited losses in the safe-haven asset.

U.S. gold futures settled down 0.7% at $1,930.

(Reporting by Herbert Lash, additional reporting by Huw Jones in London, Ankur Banerjee; editing by Nick Macfie, Elaine Hardcastle, Sharon Singleton and Jonathan Oatis)