* Dollar rises on Fed official's QE2 comments
* World stocks up slightly, Wall Street gains
* Italian banks weigh early on European stocks
* Euro/yen hits 10-month high, euro-dollar up too
* S&P downgrades Portugal and Greece (Updates with Treasuries auction, S&P downgrade of Portugal and Greece, new prices)
By Barani Krishnan
NEW YORK, March 29 (Reuters) - The U.S. dollar rose on Tuesday on speculation the Federal Reserve might curtail a program aimed at keeping interest rates low, while U.S. stocks rose and Treasuries prices fell.
European shares ended flat after weakness in the banking sector. World stocks as measured by MSCI <.MIWD00000PUS> were up 0.1 percent after slipping about 0.3 percent earlier.
U.S. Treasuries widened losses after the sale of $35 billion in five-year notes. It was the second of the Treasury's three auctions of coupons this week, totaling $99 billion.
The dollar rose against the euro after the president of the St. Louis Federal Reserve Bank, James Bullard, told an audience in Prague the U.S. economy was strong enough to curtail the Fed's $600 billion asset purchase program by some $100 billion. For details, see [ID:nLDE72S0RJ].
Standard & Poor's downgraded Greece and Portugal's ratings, citing risks that their debt could be subordinated to any future European bailout mechanism. The downgrades left Portugal one notch above junk and Greece's credit-worthiness below that of Egypt, deepening the debt woes of two of the weakest countries in the euro zone. [ID:nLDE72S1LY]
EUROPEAN BOND YIELDS
Among European bonds, Portugal's 10- and 2-year yields jumped to euro lifetime highs and Greece's 2-year yields rose 10 basis points to 15.46 percent following the S&P downgrade.
U.S. stocks rose on strength in large-cap technology shares after falling a day earlier on the lowest volume for 2011.
"The quarter is ending with a lot of uncertainties out there," said Michael Shaoul, chairman of the New York-based Marketfield Asset Management, which oversees $973 million.
"There's nothing obvious about what investors need to do in this environment, and that's why you're seeing such low volume," he said. "No one has any reason to recommit capital."
Wall Street remained cautious over crises in Japan and the Middle East and north Africa.
But Amazon.com Inc
Cisco Systems
The Dow Jones industrial average <.DJI> was up 64.48 points, or 0.5 percent, at 12,262.36. The Standard & Poor's 500 Index <.SPX> was up 5.52 points, or 0.4 percent, at 1,315.71. The Nasdaq Composite Index <.IXIC> was up 17.99 points, or 0.7 percent, at 2,748.67. [.N]
European banking shares had pushed world stocks lower after a surprise capital increase by an Italian bank.
The announcement by Italy's UBI Banca's
The FTSEurofirst 300 <.FTEU3> index of top European shares closed up 0.04 percent at 1,125.94 points.
The euro hit a session low of $1.4060 on the EBS trading
platform after falling through reported bids at $1.4080. It
last traded at $1.4088
UNCERTAINTY FOR COMMODITIES
The dollar and euro both reached their highest levels against the yen since March 18 when the Bank of Japan and others intervened to stop yen gains.
The dollar rose to 82.42 yen
In commodity markets, uncertainty over Libya drove up the price of oil as government troops halted a rebel advance aimed at restoring oil exports from the OPEC member.
Analysts said unrest in the Middle East was lending broad support to oil and other commodities while Japan's nuclear crisis posed growth worries over demand for raw materials .
"We have two factors that are countervailing," said Harry Tchilinguirian, analyst at BNP Paribas.
"There is a risk premium in the Middle East built in on risk of further contagion. On the other hand we have the fact Japan is a major component of the global supply chain, so the potential for a price correction in the second quarter remains."
U.S. crude oil's benchmark May contract
Gold remained under pressure after Monday's losses as the prospect of interest rate increases undermined its appeal as an inflation hedge. [MET/L] [GOL/] (Additional reporting by Atul Prakash, Jessica Mortimer and Richard Leong; Editing by Kenneth Barry)