GLOBAL MARKETS-Stocks rally in low volume, dollar up ahead of Fed

(Updates to U.S (Other OTC: UBGXF - news) . market close)

* U.S. oil drops after White House comment on export ban, then rallies

* U.S. 30-yr yield at near 2-mo high, 2-yr at four year high

* Yen slips, euro dips

By Rodrigo Campos

NEW YORK, Sept 15 (Reuters) - Stocks rose sharply on Wall Street and in Europe on Tuesday, supported by growing U.S. retail sales, though caution remained ahead of a possible rate increase by the U.S. central bank later in the week, which would be its first in nearly a decade.

The U.S. dollar index advanced the most in two weeks, while U.S. oil jumped more than 1 percent despite a burst of selling after the White House said it would not support a bill to end the 40-year-old ban on crude oil exports.

Worries about slowing Chinese and global growth and the prospect of higher U.S. borrowing costs have weighed on markets for weeks. However, some expect the Fed to hike rates as a confirmation that the U.S. economy no longer needs supportive measures from the central bank.

The U.S. benchmark S&P 500 index rose the most in a week but volume on U.S. exchanges was low, with about 5.8 billion shares changing hands, compared with the 8 billion daily average in the last 20 sessions. Traders say low volume helps exaggerate the magnitude of daily moves.

"You're clearly in a wait-and-see mode. The market picked a direction and it's hard for anyone to get in the way, that's where the low volume matters," said Art Hogan, chief market strategist at Wunderlich Securities in New York.

He said if the Fed does not raise rates this week the market will likely see it as a sign of a weakened economy.

The Dow Jones industrial average rose 228.89 points, or 1.4 percent, to 16,599.85, the S&P 500 gained 25.06 points, or 1.28 percent, to 1,978.09 and the Nasdaq Composite added 54.76 points, or 1.14 percent, to 4,860.52.

The pan-European FTSEurofirst 300 index ended up 0.85 percent and MSCI (NYSE: MSCI - news) 's gauge of major equity markets globally gained 0.75 percent.

Ahead of the open in Tokyo, Nikkei futures rose 1.4 percent.

Overnight, Shanghai stocks fell 3.55 percent as growth concerns in the world's second-largest economy linger.

RISK ON, FOR NOW

The Commerce Department said U.S. consumer spending grew at a fairly healthy pace over the past two months, but factory production slipped in August, providing the Fed a mixed economic picture before its policymakers meet on Wednesday.

Trading in U.S. Treasuries was thin ahead of the Fed meeting, but prices stumbled after the retail sales data and as risk appetite rose. A rise in German Bund yields also pushed U.S. yields higher.

U.S. 30-year Treasury bonds were last down 2-8/32 in price to yield 3.062 percent, from a yield of 2.946 percent late Monday. Benchmark 10-year Treasury notes were last down 29/32 in price to yield 2.283 percent, from a yield of 2.18 percent late Monday.

Two-year Treasury yields fell 5/32 in price to yield 0.8065 percent, the highest since April 2011.

"What you are seeing is thin volumes as a solid portion of the market is awaiting the outcome of the Fed meeting," said Matthias Rusinski, U.S. rates strategist at UBS (NYSEArca: FBGX - news) in New York.

The yen, a traditional safe haven, fell 0.2 percent at 120.43 per dollar after rising as much as 0.7 percent earlier. The Bank of Japan held policy steady at the end of a two-day meeting.

The euro gave up about 0.4 percent against the greenback at $1.1270. The dollar index gained 0.37 percent, the most for any day since Sept. 3.

U.S. crude futures prices jumped 2.3 percent to $45 a barrel while Brent added 0.5 percent at $46.60. Copper gained 0.7 percent to $5,346.85 a tonne. (Editing by Chizu Nomiyama and Dan Grebler)