Updates prices

By Naomi Rovnick and Koh Gui Qing

NEW YORK/LONDON June 9 (Reuters) -U.S. shares struck new highs for the year on Friday, setting world stocks up for gains for the week, as rising bets that the Federal Reserve will skip a rate hike next week overshadowed worries about U.S. markets being drained of cash.

Helped by a surge in Tesla Inc TSLA.O, which jumped as much as 5.7%, the S&P 500 .SPX rose to levels last seen in August before receding by mid-day to be little changed. The Nasdaq Composite .IXIC and the Dow Jones Industrial Average .DJI also pared earlier gains to stand flat.

Over in Europe, the STOXX 600 .STOXX index lost 0.13%, but MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS jumped 0.74% overnight. Combined with gains on Wall Street, the MSCI's broadest index of world stocks .MIWD00000PUS added 0.14% to hover under a 13-month high. For the week, the index for world stocks might notch a 0.4% rise.

"As of today, the S&P 500 is back in a bull market," said Arthur Hogan, chief market strategist at Briley Wealth, noting that the index finished Thursday with a 20% gain off its recent lows. "The one thing that could tip over the apple cart is an over-aggressive Fed."

Refinitiv data showed the S&P 500 up 20% from its Oct. 12 closing low. The most commonly accepted definition of a bull market is a 20% rise off a low, and a 20% decline from a high for a bear market, but that is open to interpretation.

Traders now lay 73% odds FEDWATCH on the Fed keeping rates steady on June 14, in a range of 5%-5.25%, pausing its most aggressive hiking cycle since the 1980s.

Bets for a pause were supported by data on Thursday that showed the number of Americans filing new jobless claims surged to a more than 1 1/2-year high, indicating a loosening labour market that could further quell inflation.

Investors also hope the Fed will pause its rate rise campaign as a quirk of the U.S. debt ceiling negotiations has posed a potential threat to market liquidity.

The U.S. government is expected to rush to sell short-term debt to replenish its Treasury General Account (TGA), potentially at yields so high that banks raise deposit rates to compete for funding, reducing interest in riskier assets like equities.

"We're all worried about liquidity," said Ben Jones, director of macro research at Invesco. The Fed, he added, "still wants to tighten" policy and therefore may allow the TGA rebuild to drain liquidity from markets without stepping in to provide other support tools.

This fear was not dominating trading on Friday, however.

Fed Chair Jerome Powell said on May 19 it was still unclear if U.S. interest rates will need to rise further, and the risks of overtightening or undertightening had become more balanced.

YIELDS UP

Uncertainty about the U.S. rates outlook supported Treasury yields.

Two-year Treasury yields US2YT=RR, which are extremely sensitive to monetary policy expectations, rose 7 basis points to 4.589%, while the yield on benchmark 10-year notes US10YT=RR rose 3.9 basis points to 3.753%. US/

The U.S. dollar index =USD, which measures the performance of the U.S. currency against six others, rebounded 0.21% to 103.47.

The euro EUR=EBS slipped 0.32% to $1.0748, just below Thursday's two-week high of $1.0787. USD/

Elsewhere, the Turkish lira TRYTOM=D3 hit a new record low overnight of 23.54 per dollar, even as President Tayyip Erdogan's appointment of a U.S. banker as central bank chief sent a strong signal for a return to more orthodox policy.

Erdogan last week put well-regarded former finance minister Mehmet Simsek back in the post. Simsek said this week that the guiding principles for the economy would be transparency, consistency, accountability and predictability.

Leading crypto asset bitcoin BTC=BTSP dipped 0.2% to $26,648 after crypto exchange Binance said it was suspending dollar deposits and would soon pause fiat currency withdrawal channels following a U.S. Securities and Exchange Commission crackdown.

Crude oil edged higher but gains were tempered by a report that the United States and Iran were close to a nuclear deal, although denials from both parties kept it off the previous session's lows.

The prospect of a deal, which reportedly included scope for an additional 1 million barrels per day of Iranian supply, initially dented crude prices.

Brent crude futures fell by as much as 0.9% at one point, before reversing course to last trade flat at $76.00 a barrel. West Texas Intermediate crude CLc1 was also steady at $71.28 a barrel. O/R

Reporting by Naomi Rovnick and Kevin Buckland; Editing by Chizu Nomiyama, Nick Macfie and Mark Potter

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