World stocks and the euro rallied on Thursday on encouraging U.S. economic data and indications that euro-zone leaders were on track to approve a crucial bailout for Greece.

The European common currency erased initial losses against the dollar after a euro-zone official said leaders were finishing the details of a second bailout for Greece worth at least 130 billion euros.

The development eased fears of a chaotic Greek default, driving prices of safe-haven 30-year U.S. Treasuries bonds down about 1 point.

Investor sentiment also got a boost from data showing claims for U.S. unemployment benefits unexpectedly fell to a near four-year low last week while U.S. housing starts for January rose more than expected.

Key Wall Street indexes ended around 1 percent higher. The S&P 500 had its best daily performance in two weeks and finished at its highest level since May 2011.

We're getting this incredible flow of good data. It's hard not to want to step into the market, said Jim Paulsen, chief investment officer at Wells Capital Management in Minneapolis.

People are increasingly of the opinion that although Europe will continue to have flare-ups, it's not likely to become a calamity for the world economy, he said.

The Dow Jones industrial average <.DJI> rose 123.13 points, or 0.96 percent, to close at 12,904.08. The Standard & Poor's 500 Index <.SPX> gained 14.81 points, or 1.10 percent, to 1,358.04. The Nasdaq Composite Index <.IXIC> climbed 44.02 points, or 1.51 percent, to 2,959.85.

In Europe, the FTSEurofirst 300 <.FTEU3> erased losses and closed 0.11 percent higher as expectations of a Greek bailout grew. World stocks as measured by the benchmark MSCI All-Country World Index <.MIWD00000PUS> rose 0.48 percent.

The euro rose 0.5 percent to $1.313. It also jumped 1.15 percent against the yen, to a two-month high of 103.61.

The possibility of some concrete progress (in Greece's bailout deal) is reinvigorating risk appetite and pushing up the euro, said Kathy Lien, director of research at GFT Forex in Jersey City. We're finally walking in the right direction.

As investors moved into stocks, prices of benchmark 10-year U.S. Treasury notes fell 14/32, sending their yield up to 1.982 percent. Thirty-year Treasuries were 31/32 lower in price, their yield at 3.15 percent.

Long-dated debt extended price losses after the Treasury sold $9 billion in Treasury-Inflation Protected Securities (TIPS) at higher yields than were expected before the sale.

U.S. crude oil futures rose 0.5 percent to settle at $102.31 a barrel, driven up by concerns about disruption in supplies from Iran and the North Sea.

(Additional reporting by Rodrigo Campos, Luciana Lopez and Karen Brettell; Editing by Kenneth Barry, Dan Grebler and Padraic Cassidy)