GLOBAL MARKETS-Oil tumbles 3 percent but stocks hold ground

* Oil prices give up gains, fall 3 percent

* European stocks trim early falls

* Dollar down 0.2 pct vs euro and 0.3 pct vs yen

* German business sentiment hits 11-month low

* Focus turns to Fed meeting on Tue and Wed (Updates)

By Dhara Ranasinghe

LONDON, Jan 25 (Reuters) - Oil prices tumbled 3 percent on Monday and dragged the dollar down, but world stocks clung onto gains in a sign of stabilisation after a horrendous start to the year.

Crude oil prices fell 3 percent as Iraq announced record-high oil production feeding into a heavily over supplied market, wiping out much of the gains made in one of the biggest-ever daily rallies last Friday.

That tumble briefly weighed on stocks, which recovered ground as hopes of further monetary stimulus by major central banks helped take the edge off the bearish sentiment that has dominated since the start of the year.

The MSCI world equity index was up 0.1 percent, almost 5 percent above 2-1/2 year lows hit last week.

Asian stocks rose 1.5 percent and moved further away from last week's four-year low, while U.S (Other OTC: UBGXF - news) . stock futures traded just 0.1 percent lower.

"Risk-asset markets have received a boost from the European Central Bank hinting at stimulus last week, and investors are also looking at whether the fall in stocks has run its course," said Philip Shaw, chief economist at Investec (LSE: INVP.L - news) in London.

Global markets slumped at the start of the year on fears that a slowdown in China would spread to the rest of the world economy, while oil prices sank to 13-year lows.

German business morale fell to an 11-month low in January, a survey showed, suggesting growing concern among company executives in Europe's largest economy.

The Ifo survey reading of 107.3 compared with 108.6 in December and was well below 108.4 forecast in a Reuters poll.

FED IN FOCUS

Market turbulence sets the backdrop for a meeting of the U.S. Federal Reserve on Tuesday and Wednesday, while Bank of Japan policymakers gather on Jan. 28-29.

Last week, the European Central Bank signalled it could deliver further monetary stimulus, raising hopes that other central banks might take the same path.

The market rout meanwhile could throw the Fed off its course of gradual interest rate hikes.

"Attention will now turn to the U.S. Federal Reserve and the Bank of Japan's latest policy decisions later this week, with the main focus on the U.S. central bank in the wake of last month's historic decision to raise rates for the first time in nine years," said Michael Hewson, chief market analyst at CMC (Shanghai: 600327.SS - news) Markets.

Stock markets in London, Frankfurt and Paris reversed early falls to trade virtually unchanged on the day.

Emerging market stocks extended their gains and hit a 10-day high, while in Asia Shanghai stocks added 1 percent and Tokyo's Nikkei, which slumped to a one-year low last week, rose 1.2 percent.

DOLLAR SLIPS

The dollar edged down against other major currencies as renewed selling on oil markets drove investors into their current safe havens of choice, the euro and yen.

The dollar slipped 0.3 percent to 118.40 yen, moving away from a two-week high touched on Friday at 118.88. The euro firmed 0.2 percent to $1.0813, after losing 0.8 percent on Friday.

The Russian rouble and other currencies sensitive to movements in commodity prices, weakened. The rouble was 2 percent weaker against the dollar at 79.80, while the Australian dollar was down 0.3 percent to $0.6982, backing off a nine-day high of $0.7046 on Friday.

Brent crude oil futures fell 85 cents to $31.34 a barrel. U.S. crude declined $1 cents to $31.18 a barrel.

Iraq's oil ministry told Reuters on Monday that oil output reached a record high in December, putting oil prices under renewed pressure after signs of recovery last week.

U.S. Treasury yields were down 1.7 basis points at 2.03 percent, as the fall in oil prices leant some support to safe-haven debt.

Elsewhere, Greek two-year government bond yields fell 3 basis points to 13.54 percent and the stock market rose 1 percent after Standard & Poor's raised Greece's rating by one notch to B minus on Friday. (Additional reporting by Patrick Graham; Editing by Hugh Lawson (Other OTC: LWSOF - news) )