* U.S. leaders appear poised for debt ceiling agreement

* T-bill yields gain after U.S. spending data

* Worries over China recovery hit mood

NEW YORK/LONDON, May 26 (Reuters) - Wall Street's main indexes rose as European shares logged their largest one-day gain in two months on Friday, and Treasury yields climbed as investors rethought how long interest rates were likely to keep rising.

Democratic and Republican negotiators were still struggling to reach a deal to raise the U.S. government's debt ceiling with the deadline looming.

The MSCI world equity index, which tracks shares in 49 nations, gained 1.05% by 2:20 p.m. EDT (1820 GMT) but was still down on the week.

The index extended gains after U.S. data showed stronger-than-expected consumer spending in April.

U.S. President Joe Biden and top congressional Republican Kevin McCarthy appeared to be closing in on an agreement ahead of a June 1 deadline that would raise the government's $31.4 trillion debt ceiling for two years, but a top Republican said there were disagreements over some benefit programs for low-income Americans.

The dollar eased against a basket of currencies, but was still on track for a third straight weekly gain as markets bet on higher-for-longer interest rates.

Gold edged up from two-month lows, and oil prices rose.

Euro zone government bond yields were higher as robust economic data and hawkish remarks by central bank officials triggered some upward repricing in market bets on euro zone interest rates.

"This week has been a bit of a wake-up call to rate expectations. There is a realization that inflation is going to be stickier for a lot longer," said Mike Hewson, chief markets strategist at CMC Markets.

Treasury Secretary Janet Yellen spoke about the U.S. economy's resilience in a meeting with International Monetary Fund (IMF) Managing Director Kristalina Georgieva.

The Dow Jones Industrial Average rose 296.68 points, or 0.91%, to 33,063.07, the S&P 500 gained 49.48 points, or 1.19%, to 4,200.76 and the Nasdaq Composite gained 261.16 points, or 2.06%, to 12,959.25.

Strong U.S. consumer spending data boosted the economy's prospects for the second quarter and inflation picked up, the Commerce Department said on Friday.

Chipmaker Marvell Technology Inc surged 30% after it forecast its annual artificial-intelligence (AI) revenue would double.

Shares of the world's most valuable chipmaker, Nvidia Corp , added 2.30% after vaulting to a record high on Thursday following a bumper forecast.

The pan-European STOXX 600 index closed 1.2% higher, bouncing back from Thursday's eight-week low. Swedish gaming company Embracer jumped 13.1% to top the index, and Faurecia added 7.5% after Jefferies upgraded the French car parts maker to "buy".

Italy hopes to close 2023 with economic growth of between 1.2%-1.4%, higher than the official target set at 1% in April, Economy Minister Giancarlo Giorgetti said.

The yield on two-year Treasury notes, which rises with traders' expectations of higher Fed fund rates, rose to 4.5598% from 4.51% previously.

CHINA RECOVERY QUESTIONED

In Asia, Japan's Nikkei rose 0.4% with revenue and production upgrades for Nvidia boosting Japanese firms with exposure.

The cost of insuring exposure to U.S. government debt dropped on Friday.

China's yuan slid along with Chinese stocks as the shine comes off expectations of a booming post-pandemic recovery, sending steel prices in the country to a three-year low.

"The U.S. debt issues are not the only 'ceiling' that we are dealing with, as a slowdown in Chinese economic data suggests that a ceiling for growth may be forming as well," said RBC technical strategist George Davis. Brent crude futures rose 0.66% to $76.76 a barrel and U.S. crude gained 0.89% to $72.47.

Spot gold prices rose 0.27% to $1,945.55 an ounce, and gold futures edged up 0.03% to settle at $1,944.30.

(Reporting by Chris Prentice in New York and Huw Jones in London Additional reporting by Tom Westbrook; Editing by Richard Chang, Kirsten Donovan)