* MSCI World index down 0.5 pct on Italy vote concern
* U.S. stocks up on Bernanke comments, economic data
* Italian bond yields rise by most this year
By Caroline Valetkevitch
NEW YORK, Feb 26 (Reuters) - U.S. stocks jumped on Tuesday after Federal Reserve Chairman Ben Bernanke reassured investors about the continuation of stimulus measures, bucking a downward trend in global equities and the euro on the uncertainty created by Italy's election.
A closely watched gauge of European stock market volatility hit a 2013 high after the muddy election outcome in Italy raised fresh concern about the outlook for the euro zone's debt crisis.
Investors are fearful that the strength of the vote for anti-austerity parties will weaken efforts to reform Italy's public finances and its labor laws, damaging the euro zone's efforts to resolve its three-year old debt crisis.
"This should remind us the crisis has only been in remission," said Bruce McCain, chief investment strategist at Key Private Bank in Cleveland, Ohio.
The uncertainty led to a sharp rise in volatility, with Europe's VSTOXX index, which reflects demand for protection against a drop in major European equities, hitting a new year's high on Tuesday at 24.73.
The MSCI world equity index was down 0.5 percent, while the pan-European FTSEurofirst 300 index ended 1.4 percent lower.
Southern European government bond prices sank. Italy's 10-year bond yields rose as much as half a point to 4.86 percent, their highest since mid-December.
U.S. stocks climbed as Bernanke strongly defended the Fed's bond-buying stimulus, easing worries that monetary policymakers might be getting cold feet about continuing the extraordinary measures to support the economy.
On Wall Street, the Dow Jones (DJI: ^DJI - news) industrial average was up 117.34 points, or 0.85 percent, at 13,901.51. The Standard & Poor's 500 Index was up 9.09 points, or 0.61 percent, at 1,496.94. The Nasdaq Composite Index was up 14.22 points, or 0.46 percent, at 3,130.47.
In the foreign exchange market, the euro dropped against the dollar and remained highly susceptible to further selling as political gridlock in Italy caused the government's borrowing costs to jump.
The euro last traded at $1.3048, down 0.1 percent on the day, but above a low of $1.3017 hit during early London hours, which was the lowest level since Jan. 7. Against the yen, the euro last traded down 0.6 percent at 119.24 yen.
The dollar erased early gains and was down for a second straight day against the yen. It last traded at 91.34 yen , down 0.5 percent on the day and not far from a low of 90.92 yen on Monday, its lowest in nearly a month.
The Italian elections weighed on oil prices. Brent crude oil futures fell by more than $2 a barrel to $112.41, touching the lowest level since Jan. 24. Brent crude for April delivery was down $1.94 at $112.50.
U.S. BONDS SLIP
The fear of an uncertain political and economic landscape in Italy, along with Bernanke's comments, inspired a persistent bid for U.S. debt, cushioning a fall in Treasury prices.
The benchmark 10-year U.S. Treasury note was down 4/32, with the yield at 1.8774 percent.
U.S. financial markets were rattled last week when minutes of the Fed's January meeting showed some officials were thinking of scaling back its monetary stimulus earlier than expected.
In his testimony, Bernanke also urged lawmakers to avoid sharp spending cuts set to start taking effect on Friday.
"Bernanke's commentary showed the Fed chairman wants to continue quantitative easing (i.e. bond purchases) and keep its general stance of monetary policy accommodation," said Eric Stein, vice president and portfolio manager at Boston-based Eaton Vance Investment Managers.
The Fed is currently buying $85 billion in bonds each month and has said it plans to keep purchasing assets until it sees a substantial improvement in the outlook for the labor market.
Adding to support for U.S. stocks, U.S. home prices closed out 2012 with the biggest annual gain in more than six years, according to the S&P/Case Shiller index. U.S. government data showed that sales of new homes spiked in January, the latest sign that the long-suffering housing market was on the mend.
A separate report showed U.S. consumer confidence rose more than expected this month as Americans shrugged off worries about fiscal policy.