GLOBAL MARKETS-Stocks at three-week highs as Fed decision looms

(adds jobless claims data)

* Markets wait for U.S (Other OTC: UBGXF - news) . Fed rate decision, due at 1800 GMT

* Asian shares end higher, Europe flat ahead of decision

* Dollar drifts lower

* U.S. short-term yields near 4 1/2-year high

By Marc Jones

LONDON, Sept 17 (Reuters) - World stocks inched to a

three-week high and the dollar drifted lower on Thursday as

markets waited to see if the Federal Reserve would raise U.S.

interest rates for the first time in almost a decade, or opt to

wait a little longer.

Before the announcement at 1800 GMT, markets were still

leaning towards the latter although the high uncertainty had

kept Europe main markets at virtual standstill for most

of the session after two days of gains.

Rises overnight in Asia meant MSCI (NYSE: MSCI - news) 's all-world share index

had managed a three-week high, but it was small

scale stuff and currency and bond markets moves were low key

too.

The dollar was under some mild pressure, mostly from

the euro after weak U.S. inflation data had underscored

one of the arguments for the Fed to hold fire.

Wall Street meanwhile was also set for a subdued

start after it had finished at a near month high on Wednesday

while oil and other commodities gave back some of the

sharp gains they had made.

"I think path (timeline for future moves) is more important

than the rate decision today," said Didier Duret, Chief

Investment Officer at ABN Amro.

"They want to stabilise the market's confidence, so I think

they will wait till October ... but they will maintain a very

prudent and cautious approach, after all they are still the

masters of the universe."

The Fed's decision is attracting so much attention in world

markets because a hike would be its first since 2006 as well as

finally lifting rates from the near zero they have been at since

the depths of the global financial crisis in late 2008.

It (Other OTC: ITGL - news) has been expected to pull the trigger for most of this

year, but those expectations have faded following a bout of

global market turmoil over the past couple of months, especially

in China.

A further drop in jobless claims ahead of

the U.S. open bolstered signs of improvement in the employment

market. But futures price continued to suggest an only one in

four chance of a hike later in the day.

The latest poll by Reuters on Wednesday also showed the

majority of economists also now expect no hike, although it

remains a close call.

(Fed rate decision in graphics:

http://graphics.thomsonreuters.com/15/fed/index.html)

FEDY STEADY GO?

Wall Street's S&P 500, Dow Jones Industrial

and the Nasdaq (NasdaqGS: NDAQ - news) indexes were expected to spend the final

hours of the Fed countdown 0.2 and 0.3 percent in the red after

all three hit near one-month highs on Wednesday.

MSCI's 45-country all world index had

reached a similar peak overnight after Japan's Nikkei

shrugged off another drop in exports to climb

1.4 percent and Australian and Malaysian shares

rose 1 and 1.8 percent.

There was a late 2 percent dip in Chinese stocks,

but after their recent volatility it raised few eyebrows.

Even (Taiwan OTC: 6436.TWO - news) if the Fed were to raise rates later, many market

players expect officials to signal a cautious stance on the pace

of future increases, rather than herald a brisk series of

increases.

There is also the comfort that both the European Central

Bank and the Bank of Japan appear to be gearing up for fresh

rounds of stimulus and rates are still being cut in many parts

of the world.

Switzerland's central bank said on Thursday, for example,

that its negative interest rates, the lowest in the world,

would stay in place for the foreseeable future, as it seeks to

weaken a "significantly overvalued" Swiss franc and combat a

deeper-than-expected bout of deflation.

The latter worry was pinned on the recent slump in oil

prices.

They appear to have largely stabilised over the past month

following their April to August swoon but were giving up ground

again ahead of U.S. trading. U.S. West Texas Intermediate (WTI)

crude was down 1.5 percent at $46.45 per barrel and Brent

back under $50 a barrel to $48.90.

Gold (Other OTC: GDCWF - news) , also dipped to $1,120 per ounce and silver

and other metals markets were down too after most had

made decent gains on Wednesday.

In bond markets there was no getting away from the Fed

debate. The yield on the U.S. two-year treasury note, seen as

most sensitive to the Fed's decision, held near a 4-1/2-year

high at 0.803 percent.

Even if the central bank does not pull the trigger later, it

is still expected to by the end of the year.

Euro zone bonds were largely steady, meanwhile, as France

and Spain breezed through the potentially uncomfortable task of

selling debt hours before the U.S. rate decision.

(Additional reporting by Marius Zaharia in London and Saikat

Chatterjee in Hong Kong; Editing by Alison Williams)