World stocks rose on Friday and were on track for their biggest weekly gain since March 2009 as U.S. data showed a drop in the jobless rate, while the euro fell after four days of gains.

The U.S. jobs data supported views that the U.S. economy would avoid another recession.

Markets have posted strong gains after central bank moves earlier this week cut funding costs for banks. Signs that euro zone policymakers are working hard to resolve a compromise deal ahead of a December 9 summit, viewed as make-or-break for the 12-year old single currency bloc, also lent support.

World stocks on the MSCI all-country index were up 0.3 percent, off earlier levels. The index is up about 8.4 percent so far this week, which would be its biggest weekly gain since March 2009. Earlier in the day, it was on track to post its biggest gain since November 2008.

U.S. stocks rose but were off their highs of the day. The Dow Jones industrial average <.DJI> was up 24.97 points, or 0.21 percent, at 12,045.00. The Standard & Poor's 500 Index <.SPX> was up 5.20 points, or 0.42 percent, at 1,249.78. The Nasdaq Composite Index <.IXIC> was up 12.08 points, or 0.46 percent, at 2,638.28.

The U.S. government said the economy created 120,000 jobs last month, while the jobless rate dropped to a 2-1/2 year low of 8.6 percent, further evidence the economic recovery was gaining momentum.

Overall this an encouraging report on the labour market, said David Resler, chief economist at Nomura Securities in New York. But we shouldn't get too excited that we're going to see four-tenths of a percent decline in the unemployment rate very often.

In currency markets, the euro fell to session lows against the U.S. dollar and trimmed gains against the yen and Swiss franc.

Investors were hesitant to go overly long the euro ahead of the weekend and key event risks next week. The euro fell as low as $1.33630, blowing through stops at $1.34150. It was last at $1.33848 on trading platform EBS, down 0.6 percent on the day.

Speculation that the European Central Bank may lend to weak euro zone countries through the International Monetary Fund initially helped the euro.

Much caution remains in markets overall. Traders cited speculation about a possible downgrade of Spain's credit rating.

It's a very rumour-driven market so there's a lot of caution, said David Watt, senior currency strategist at RBC Capital Markets in Toronto.

The dollar rose 0.5 percent against a currency basket <.DXY> at 78.686.

U.S. Treasury prices rose. Benchmark 10-year Treasury notes traded 10/32 higher in price to yield 2.05 percent, down from 2.10 percent late Thursday.

Three-month dollar Libor rose and overnight borrowing from the European Central Bank was at its highest since March.

Brent crude oil futures rose in choppy trade, while gold also edged up.

(Reporting by Caroline Valetkevitch in New York, with additional reporting by Sujata Rao in London and by Angela Moon and Gertrude Chavez-Dreyfuss in New York; Editing by Dan Grebler)