* Commodities jump in relief rally after China GDP data

  * Euro rebounds on speculation of major asset allocation shift

  * Moody's credit downgrade of Italy had earlier pressured euro

  * U.S. government debt prices fall

  By Herbert Lash

  NEW YORK, July 13 (Reuters) - Global stocks and oil prices surged in a relief rally o n F riday after Chinese data eased fears of a potential hard landing for the world's No. 2 economy and a further blow to growth worldwide.

  U.S. stocks broke a six-day losing streak, and the euro advanced against the dollar for the first time in four days as risk sentiment broadly improved and investors covered bets against the currency.

  Wall Street surged in the last hour of the session in light trading, just pushing the Dow and S& P 500 into positive territory for the week. The Nasdaq also rose but remained in negative territory for the week.

  " There was a little bit of short-covering going into the weekend, accelerating to the upside, but on very light volume," said Douglas DePietro, a managing director at Evercore Partners in New York. " I don't think there's a whole lot to make of it, maybe a little bit of buy program out there."

  A 7.6 percent reading of gross domestic product growth in China was a hair above the government's expectations, bolstering sentiment across the board in commodities and buoying equities.

  The euro rebounded from a fresh two-year low plumbed earlier in the day, as investors sought to cover bets against the currency and risk sentiment broadly improved.

  " The data out of China suggested that things are not all that bad, and that's giving a relief rally," said Randy Frederick, managing director of trading and derivatives with the Schwab Center for Financial Research.

  " But I think the rally today is a lot stronger than it should be, and I don't expect this to continue for very long."

  JPMorgan Chase & Co posted $4.4 billion of losses from its " London whale" trades and said it may incur $700 million to $1.7 billion in further losses.

  But the bank's stock rose 6 percent to $36.07 as the trading losses cut second-quarter profit by only $471 million from a year earlier, to $4.96 billion.

  JPMorgan's surge added the most points to the S& P 500, and lifted the banking sector by 3.26 percent.

  Concerns about slowing growth have pressured risk assets in the recent past.

  " The market was very oversold, so with China looking better than we previously thought, and JPMorgan looking like it has healed itself, things appear contained for the moment," said John Manley, chief equity strategist at Wells Fargo Funds Management in New York. " We're putting in a bottom, not a top."

  Investors shrugged off a survey that showed U.S. consumer sentiment cooled again in early July to its lowest in seven months as Americans took a dim view of their finances and job prospects.

  The Thomson Reuters/University of Michigan's preliminary reading on the overall index on consumer sentiment fell to 72.0 from 73.2 in June.

  Separately, producer prices rose only slightly in June as energy costs dropped, suggesting inflation pressures remain muted. The Labor Department said seasonally adjusted producer prices rose 0.1 percent, a pace that leaves the door open for more efforts from the Federal Reserve to stimulate the economy.

  The Dow Jones industrial average closed up 203.82 points, or 1.62 percent, at 12,777.09. The Standard & Poor's 500 Index added 22.02 points, or 1.65 percent, at 1,356.78. The Nasdaq Composite Index climbed 42.28 points, or 1.48 percent, at 2,908.47.

  For the week, the Dow gained 0.04 percent, the S& P rose 0.15 percent but Nasdaq fell 0.98 percent.

  European shares extended gains, with traders citing speculation of a shift in asset allocation as the jump in U.S. stocks helped the euro to rebound from a two-year low against the U.S. dollar.

  The euro last traded at $1.2242, up 0.4 percent, rebounding from a mid-2010 low of $1.2160 hit earlier in the session.

  The FTSEurofirst 300 rose 1.3 percent to close at 1,042.63.

  " There is a major asset allocation switch out of Treasury long-end ETFs into European equities happening right now," said Justin Haque, a trader at Hobart Capital Markets.

  The benchmark 10-year U.S. Treasury note was down 4/32 in price to yield 1.4893 percent.

  The euro's rebound also changed sentiment on Italian government debt. Italian yields had jumped after a surprise ratings cut by Moody's highlighted the risk that the debt crisis could potentially engulf the euro zone's third-biggest economy.

  Moody's warned it could further downgrade Italy's credit rating, now just two notches above junk status, if the country's access to debt markets dried up.

  Commodities staged a mini relief rally as the Chinese GDP data was not as bad as some had feared.

  Brent crude oil futures settled up $1.33 to $102.40 a barrel.

  U.S. crude settled up $1.02 at $87.10 a barrel, and gained 3.1 percent for the week.

  Gold rose, lifted by sharp rallies in equities and commodities, on the Chinese data.

  U.S. gold futures for August delivery settled up $26.70 an ounce at $1,592. Spot gold prices rose 1.04 percent to $1,588.00.

  The Reuters/Jefferies CRB Index of 19 commodities rose 1.27 percent to 293.96.

(Robert Campbell is a Reuters market analyst. The views expressed are his own)

  By Robert Campbell

  NEW YORK, July 13 (Reuters) - Western diplomats can hardly believe their luck. Sanctions against Iran's oil exports are proving more effective than hoped yet the impact on the price of crude has so far been minimal.

  It was not supposed to be this way. A decade of Iranian intransigence over its disputed nuclear program had finally eroded Western patience. Sanctions were supposed to be a painful, but necessary step.

  Spurred by fears of a wider Middle Eastern conflict if Israel acted unilaterally to strike at Iran, Western governments decided to endure the consequences of tougher sanctions if they offered a peaceful route to resolving the issue.

  But so far, the pain has mostly been inflicted on Iran.

  Consider the situation in February after the European Union adopted its import ban. The International Energy Agency warned up to 1 million barrels per day of Iran's 2.6 million bpd of oil exports could be affected by tighter Western sanctions.

  Brent crude had risen to a six-month high in early February, fueled by geopolitical worries, although the market was taking the looming sanctions impact " in its stride," according to the IEA.

  Brent would later gain to nearly $130 a barrel, driven up by a combination of optimism over global economic growth and fears that this growth would drive up oil demand just as Iranian shipments withered.

  But fears of a slowdown in global economic growth have sent the benchmark futures contract back down to near $100 a barrel, roughly where they were when Europe first publicly discussed a ban on imports of Iranian crude.

  This result has been due more to luck than foresight. At the time the European ban began to be seriously discussed, Western governments believed a large release of strategic oil stocks would be needed to calm the oil market.

  Now due to the global slowdown, and extra oil supplies from Saudi Arabia, the loss of some Iranian oil production has so far not affected the balance between crude supply and demand.

  The benign situation could easily change, however. Oil traders are already nervous that the sanctions may working a little too well and flip the oil market into a supply deficit.

  Restrictions on buying shipping insurance in European markets and stepped up measures by the United States against Iran's international financial transactions have greatly complicated Tehran's oil exports to major customers in Asia.

  RISKS REMAIN

  The current oil price scenario doubtlessly came into the equation as the United States weighed how tightly it would enforce its own sanctions regime.

  If oil had been near $140 a barrel it is conceivable that Western governments might have overlooked some outlets for Iranian oil. After all, many market observers assumed earlier this year that supply and demand might only remain in balance if the West tacitly permitted Iran to export much of the crude it was not able to send to Europe.

  Instead, as we saw last week, countries like Kenya find the sanctions complicating deals for Iranian crude.

  Right now the risks to oil demand growth remain overwhelmingly on the downside. And the supply situation is forecast to be favorable.

  A number of OPEC members outside of Iran will add new capacity next year. And non-OPEC oil production should move higher through 2013.

  Little wonder the IEA's new 2013 oil market forecasts look fairly benign.

  Global demand is seen averaging 90.9 million bpd, up 1 million bpd from 2012, but the amount OPEC will need to pump on average to balance the market should fall 400,000 bpd to an even 30 million bpd.

  Moreover OPEC spare production capacity is expected to edge higher by 245,000 bpd as growth in other countries outweighs an expected 570,000 bpd decline in Iranian output capacity.

  So far, so good, right? Next year should see Iran's influence over oil markets diminish while soft demand growth gives supply a chance to catch up.

  This scenario assumes a great deal. Global oil demand does not have to grow much faster than expected to eat away at that modest gain in OPEC spare capacity.

  Nor is this outcome so far fetched. Despite the global economic slowdown, the IEA's latest forecast for 2012 oil demand is identical to that published in February: 89.9 million bpd.

  Fourth quarter demand has been revised down to 90.9 million bpd, but that is only 300,000 bpd less than the February forecast.

  The same goes for supply growth. A few project delays or faster-than-anticipated decline rates could diminish the actual growth in global oil supplies.

  A similar situation holds within OPEC. Although production capacity growth is expected from stable countries like the United Arab Emirates, Libya and Iraq are also expected to make large contributions.

  But neither of the latter two countries can be described as politically stable. Unrest could force the postponement of new projects.

  Nor can problems elsewhere in OPEC, or a bigger than expected fall in Iranian oil production be ruled out.

  PAIN ONLY DEFERRED?

  The problem with sanctions is that they are quite hard to lift. Once in place they become totems of prestige.

  Look no further than the history of sanctions against Saddam Hussein's Iraq, which were in place for more than a decade and were no where near being lifted when the United States moved to topple the regime.

  So too with Iran, I suspect. The West would pay a heavy diplomatic price if a surging oil prices forced a dilution of the sanctions regime.

  However the impact of a lengthy standoff between Iran and the West will be the destruction of a large part of Iran's oil export capacity.

  Without investment and modern technology, Iran's aging oil fields will struggle to sustain even the modest output expected in 2013.

  Yet it is currently very hard to imagine a situation where the nuclear issue is resolved to the satisfaction of all parties, allowing a major boost in Iranian oil investment.

  This may not be a problem now, but could easily become one if global growth shifts into a higher gears.