* World shares gain 0.6 percent; U.S. stocks higher
* Euro firms against dollar on Italian government formation
* Both Fed and ECB hold policy meetings this week
* Oil edges higher
By Caroline Valetkevitch
NEW YORK, April 29 (Reuters) - World stock indexes and the euro advanced on Monday as the formation of a new government in Italy eased uncertainty about the political future of the country, the third-largest economy in the euro zone, while tame inflation data drove down U.S. Treasury yields.
U.S. price data showed inflation remained quiet, suggesting the Federal Reserve, which will begin a two-day policy meeting on Tuesday, will not be ending its accommodative monetary stance any time soon.
Recent signs of weak U.S. growth had raised expectations the Fed will keep its pace of bond buying unchanged at $85 billion a month at its meeting this week, while the European Central Bank is widely expected to announce an interest rate cut when it meets on Thursday.
Investors welcomed the formation of a broad coalition government in Italy under new Prime Minister Enrico Letta, two months after inconclusive general elections, though investors remain cautious over how long the new growth-focused government will survive.
The resolution of Italy's political stalemate helped bring its five- and 10-year borrowing costs down to their lowest level since October 2010 at a bond sale on Monday, while yields on 10-year debt in the secondary market fell 13 basis points to 3.93 percent.
"Italian sovereign debt is benefiting from the twin effects of central bank liquidity support and political stability of sorts," Nicholas Spiro, managing director of London-based consultancy Spiro Sovereign Strategy, said.
MSCI (NYSE: MSCI - news) 's world equity index was up 0.6 percent, while the broad FTSE Eurofirst 300 index of top European shares provisionally closed up 0.5 percent, led higher by Milan's FTSE MIB (Milan: FTSEMIB.MI - news) , which rose 2.2 percent.
Wall Street helped world stock indexes add to gains, with U.S. stocks buoyed by stronger-than-expected housing data.
"Wall Street appears primed for another assault at record highs," said Andrew Wilkinson, chief economic strategist at Miller Tabak & Co in New York.
The Dow Jones industrial average was up 67.12 points, or 0.46 percent, at 14,779.67. The Standard & Poor's 500 Index was up 9.06 points, or 0.57 percent, at 1,591.30. The Nasdaq Composite Index was up 27.64 points, or 0.84 percent, at 3,306.90.
The Fed's stimulus measures have helped U.S. stocks rally for much of this year, with both the S&P 500 and Dow hitting record highs in the past two months.
The euro rose 0.5 percent at $1.3095, with hedge funds cited among key buyers. The euro's session peak of $1.3115, the highest since April 19, was reached midway through the London session.
A Reuters poll of 76 economists last Thursday showed only a narrow majority of 43 expected a 25 basis point cut at this week's ECB policy meeting, which would take the bank's refinancing rate to a record low of 0.5 percent.
Inflation, as reflected in the personal consumption expenditure price index, rose just 1 percent over the 12 months through March, the smallest gain since October 2009 and a slowdown from the 1.3 percent logged in the period through February.
Benchmark U.S. 10-year Treasuries were up 3/32 in price to yield 1.658 percent.
U.S. data also showed that contracts to purchase previously owned U.S. homes rose in March as the housing market continued to pick up pace this year.
The uncertain outlook for economic growth, especially in the world's two big oil consumers, the United States and China, initially kept crude prices under pressure. But prices recovered in early U.S. trading.
China is due to release surveys on activity in its giant factory sector later this week.