* Wall St indexes up 2 pct each; European shares also gain
* Dollar up against yen, euro steadies
* Gold down more than 1 pct, extending Wednesday loss
* Oil notches biggest gain since Aug 27
By Barani Krishnan
NEW YORK, Oct 10 (Reuters) - U.S. stocks had their biggest gain since the start of the year and yields on longer-dated Treasuries also rose after President Barack Obama agreed on Thursday to consider a proposal from Republican lawmakers to avert a historic debt default.
The dollar hit a two-week high against major currencies and benchmark crude oil had its biggest gain in six weeks. Gold fell its most since the start of October as investors' risk appetite grew and bets on safe-havens faded.
Obama is willing to sign a "clean" bill to raise the U.S. debt ceiling - one that does not include policy demands - but isn't clear what House Republicans are proposing, White House spokesman Jay Carney said.
Earlier, another White House official, speaking on conditions of anonymity, said Obama was willing to look at a proposal by congressional Republicans to extend the debt ceiling for six weeks, but insisted that lawmakers also end the 10-day government shutdown. The official said the plan was presented by House of Representatives Speaker John Boehner to fellow House Republicans ahead of a meeting with Obama.
"We haven't seen a bill yet," Carney told reporters, adding that Obama was "happy that cooler heads at least seem to be prevailing in the House".
U.S. Treasuries yields briefly rose to their highest levels in more than two weeks amid talk Congress could agree to raise the debt ceiling, but the lower prices and higher yields drew buyers to the Treasury's $13 billion 30-year bond auction and lifted prices from the day's lows.
Wall Street's three key stock indexes - the S&P 500, the Dow and Nasdaq - rose more than 2 percent each for their best day since January 2, when markets began trading for the year.
The Dow Jones industrial average settled up 323.09 points, or 2.18 percent, at 15,126.07. The Standard & Poor's 500 Index was up 36.16 points, or 2.18 percent, at 1,692.56. The Nasdaq Composite Index was up 82.97 points, or 2.26 percent, at 3,760.75.
Some investors seemed as cautious as they were optimistic to a potential debt deal.
"What this is, is opening the door to discussion and negotiation when before we had two sides just finger-pointing," said Peter Jankovskis, co-chief investment officer at OakBrook Investments LLC in Lisle, Illinois.
"We don't know if in six weeks we'll be in the same place but at least this opens the possibility" of a lasting deal, he said.
The closely-watched VIX index that measures investor anxiety plunged 16 percent to 16.48, near levels prior to the U.S. government shutdown.
"Today is reversing excess fear," said Jack De Gan, chief investment officer at Harbor Advisory Corp in Portsmouth, New Hampshire.
The 45-country MSCI stock index was up 1.4 percent, its strongest showing in 3 months.
European stocks also rallied, closing up 1.7 percent for the best performance in a month.
SHORT-TERM DEAL?
It is unclear how long a short-term deal would be in effect, but any move to raise the country's $16.7 trillion borrowing limit would at least stave off a possible default.
Investors expect Republicans and Democrats to cut a deal to raise the debt ceiling before the Oct. 17 deadline, though each day that passes without an agreement tests their nerves.
Data on Thursday showed the number of Americans filing new claims for unemployment benefits hit a six-month high last week, pressured by the U.S. government shutdown.
The U.S. dollar index rose 0.1 percent against a basket of currencies. The euro was flat, recovering from early pressure after French and Italian industrial production data fell short of market expectations.
Against the yen, the dollar rallied 0.9 percent to 98.23 , up from a two-month low of 96.55 yen on Tuesday. Traders said the dollar rebounded after finding strong support at its 200-day moving average, currently at 96.82.
LONG BOND YIELDS UP; GOLD TUMBLES, OIL JUMPS
Strains on short-term U.S. interest rates and funding markets eased after running up in the past two sessions.
One-month Treasury bill yields traded at 0.25 percent, down from 0.29 percent earlier in the day and Tuesday's five-year high of 0.36 percent.
The benchmark 10-year U.S. Treasury note was down 8/32, its yield at 2.6906 percent.
Thirty-year bonds erased an early loss and were up 1/32 after a new sale of $13 billion on Thursday. The yield for the issue was 3.73 percent.
There were also few signs of nervousness on European bond markets. German government bonds, typically favored by risk-sensitive investors, edged lower and higher-yielding euro zone periphery debt fared better.
As the dollar regained its footing, gold fell 1.5 percent to below $1,290 an ounce, extending Wednesday's near 1 percent decline.
Crude oil rallied after the potential for the debt deal in Congress combined with news about the Libyan prime minister's brief detention by gunmen. Benchmark Brent crude out of Europe's North Sea closed up 2.5 percent at $111.80 per barrel, its biggest gain since August 27.
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