* Wall Street hits 4-year high; global index at 3-1/2 month peak * Euro rallies to seven-week peak versus dollar * Spain, Portugal bond yields fall; ECB quells speculation By Wanfeng Zhou NEW YORK, Aug 21 (Reuters) - Global stocks rose to 3-1/2 month highs o n T uesday and the euro jumped to a seven-week peak against the U.S. dollar on hopes the European Central Bank will soon start buying Spanish and Italian bonds to contain the debt crisis. Spanish borrowing costs fell and Portuguese government bond yields declined to levels seen before Lisbon agreed to a bailout deal in May, 2011, with traders citing media reports that the ECB was drawing up detailed plans about bond-buying. The perception of declining risks from the euro crisis has been a major factor behind recent equities gains. Wall Street stocks earlier climbed to four-year highs before surrendering gains to trade little changed on the day. Uncertainty remained high and investors were concerned the ECB's condition that troubled countries ask for help from the euro zone's rescue funds before turning to the central bank may mean that the Spanish crisis could get worse before it gets better. Still, optimism over eventual ECB action boosted sentiment. "The market has moved to the belief that (the ECB) is going to do whatever it takes," said William Larkin, fixed income portfolio manager at Cabot Money Management in Salem, Massachusetts. Britain's The Daily Telegraph on Tuesday supported a weekend German report that the ECB planned to put a hard cap on Spanish and Italian bond yields. An ECB spokeswoman, asked about the Telegraph story, referred to the ECB's statement on Monday, when it said it was misleading to report on policy decisions that had not been taken. On Wall Street, the Dow Jones industrial average was down 0.70 point, or 0.01 percent, at 13,270.94. The Standard & Poor's 500 Index was up 1.94 points, or 0.14 percent, at 1,420.07. The Nasdaq Composite Index was up 1.78 points, or 0.06 percent, at 3,077.99. The S&P 500 has risen more than 3 percent so far in August. Volume has been light as investors wait for central banks' meetings next month, where policymakers are expected to take action to ease Europe's debt crisis and boost the economy. "I am looking for new highs in the major indexes," said Wayne Kaufman, chief market analyst at John Thomas Financial in New York. "Overall there is no one major negative that's out there right now that people are scared of." The MSCI global share index rose 0.6 percent to 327.31 after hitting its highest level since early May. European shares were up 0.4 percent. Yields at a Spanish short-term debt auction dived on T uesday, while Europe's VSTOXX volatility index hit a one-month low, signaling a steady rise in investors' appetite for risk. Spanish 10-year bond yields fell 11 basis points to 6.22 percent, with shorter-dated yields down as much 16 bps. Italian bond yields also dropped. Portuguese 10-year yields were last 21 basis points lower on the day at 9.48 percent, the lowest level since April 20. Portugal's original request for a bailout was on April 6, 2011 and the deal was announced on May 3 of last year. EURO RALLIES Financial markets have been on a red-hot run on hopes that the new urgency in Europe to overcome the 2-1/2-year debt crisis may allow Greece to remain in the euro zone and keep the 17-member bloc from unravel ling. Greek Prime Minister Antonis Samaras will meet German Chancellor Angela Merkel, French President Francois Hollande and Eurogroup chief Jean-Claude Juncker in the coming days to try to secure more help from the European Union, International Monetary Fund and ECB, even though Greece has fallen behind on its debt-cut targets. Samaras is expected to lobby for a two-year extension of austerity measures to soften their impact, though he is unlikely to win major concessions. The euro rallied 1 percent to $1.2468, while the dollar was little changed at 79.41 yen. U.S. Treasury debt prices fell. Benchmark yields have generally been rising since hitting a record low of 1.38 percent in late July. Ten-year notes were last trading 11/32 lower in price to yield 1.847 percent, up from 1.81 percent late Monday. Brent crude oil rose $1.10 to $114.80 a barrel and has jumped from below $90 at the end of June, propelled by maintenance in the North Sea and increased fear of military conflict between Iran and Israel. U.S. crude added $1.11 to $97.08 per barrel. Gold rallied to a 3-1/2 month high as the U.S. dollar weakened, while platinum hovered just below a two-month peak hit in the previous session as concerns over supply from top producer South Africa festered. Spot gold hit a high of $1,641.20 an ounce and was last at $1,637.56 an ounce.