By Wanfeng Zhou

NEW YORK, Dec 10 (Reuters) - The euro fell against the yen

while Italian stocks and bond prices sank on Monday after

Italian Prime Minister Mario Monti said he would resign, raising

concern about who will lead the euro zone's third biggest

economy out of its debt crisis.

U.S. equity investors focused on domestic news, driving

shares higher after stronger-than-expected sales from McDonald's

Corp while awaiting any sign of progress in budget talks in

Washington to avert looming tax hikes and spending cuts.

Monti announced over the weekend he would resign once the

2013 budget is approved, potentially bringing forward an

election due early next year. Monti has become an investor

favorite over the last year as he spearheaded a reform agenda in

a bid to rescue Italy from the threat of a Greek-style collapse.

The news pushed Italy's benchmark 10-year bond yield up to

4.83 percent, the highest in roughly more than

three weeks. Italian shares fell more than 2 percent,

with banks hit hard because of their hefty domestic government

bond holdings.

'The political situation in Italy just adds to the

uncertainty in Europe, and this will have a negative impact on

the euro in the coming months,' said Matthew Lifson, senior

trader and analyst at Cambridge Mercantile Group in Princeton,

New Jersey.

The euro fell 0.2 percent against the yen to

106.36 yen. It dropped as low as 105.94, its weakest in about

two weeks. But the common currency was able to erase losses

against the dollar to trade little changed at $1.2924.

Some analysts said the bond and currency markets' reaction

to the news out of Italy may have been overdone, given that

Monti would have called for elections in a few months time

anyway. Monti's decision simply expedites the process.

On Wall Street, the Dow Jones industrial average

gained 29.08 points, or 0.22 percent, to 13,184.21. The Standard

& Poor's 500 Index rose 2.47 points, or 0.17 percent, to

1,420.54. The Nasdaq Composite Index added 17.05 points,

or 0.57 percent, to 2,995.09.

Shares of McDonald's rose 0.8 percent to $89.23

after the fast food chain reported stronger-than-expected sales

in November, marking a rebound after a rare decline in October.

U.S. President Barack Obama met with Republican House of

Representatives Speaker John Boehner on Sunday to negotiate a

deal to avoid massive tax hikes and spending cuts that are set

to go into effect in the new year. Markets have been on edge in

the last month on forecasts that the scheduled measures could

send the economy into recession.

The two sides declined to provide details about the

unannounced meeting. Obama was expected to make remarks at 2

p.m. (1900 GMT) from Michigan where he is touring an auto

plant.

'We haven't had any 'progress' the last two weeks or so, yet

all in all equity markets have continued to hang tough,' said

Ryan Detrick, senior technical strategist at Schaeffer's

Investment Research in Cincinnati, Ohio. 'The rhetoric from

Washington is strong, but Wall Street is betting something

probably will get done.'

Gains in U.S. stocks helped European markets erase losses.

Top European shares on the FTSEurofirst 300 index last

traded 0.2 percent higher at 1134.83. The MSCI global stock

index rose 0.2 percent to 335.17.

CHINESE DATA

Commodities markets rose on data from China that showed

factory output in the world's number two economy accelerated to

an eight-month high in November.

Copper prices hit their highest level in almost two

months, gold rose to around $1,714 an ounce, and Brent

oil snapped five straight days of losses to climb back above

$108 a barrel.

Brent futures jumped to $108.54 before easing back

to trade at $108.04, up $1.02. U.S. crude rose 56 cents

to $86.49.

China's implied oil demand broke through the 10 million

barrel per day barrier for the first time ever in November, and

crude imports also rose, providing more evidence of economic

recovery.

'The figures are another confirmation that Chinese oil

demand is accelerating again, and there are good reasons to

expect that it will carry on growing strongly next year,' said

Carsten Fritsch, senior oil analyst at Commerzbank in Frankfurt.

U.S. Treasury debt prices rose on concerns over the

protracted budget negotiations in Washington, political

rumblings in Italy, and expectations for further monetary policy

easing by the Federal Reserve when it meets this week.

The benchmark 10-year U.S. Treasury note was up 2/32 in

price, with the yield at 1.6147 percent.

The Fed is expected to announce a new round of Treasury

securities purchases at the end of its two-day meeting on

Wednesday, according to a Reuters poll. The bond buying would

replace the 'Operation Twist' stimulus, which expires at the end

of December.

(Additional reporting by Gertrude Chavez-Dreyfuss, Chris Reese

and Leah Schnurr; Editing by Leslie Adler)

((Wanfeng.Zhou@thomsonreuters.com)(+1 646 223 6304)(Reuters

Messaging: wanfeng.zhou.reuters.com@reuters.net))

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