* Surprise Fed announcement spurs rally in Wall Street stocks
* World share markets extend gains, U.S. stocks surge to closing highs
* U.S. government debt prices fall; oil, gold extend gains
* Dollar at five-year high against yen, rises against euro
By Herbert Lash
NEW YORK, Dec 18 (Reuters) - Global equity markets extended gains and bond prices fell on Wednesday after the Federal Reserve finally said it would scale back its stimulus, sending a signal that the U.S. economy is on the mend and pushing the Dow and S&P 500 to record closing highs.
Stocks on Wall Street rallied more than 1 percent on the surprise Fed announcement to cut by $10 billion a month its bond purchases to a monthly $75 billion, a decision that has dogged markets all year as the U.S. central bank sent mixed signals.
"They finally pulled a Band-Aid off that they've been tugging at for a long time," said Rick Meckler, president Of LibertyView Capital Management LLC in Jersey City, New Jersey.
U.S. government debt prices fell after initial gains in reaction to outgoing Chairman Ben Bernanke's remark that the Fed might reduce its purchases steadily, implying the program would be done by the end of 2014.
The Fed also signaled it may keep its key interest rate extremely low for even longer than previously promised.
The 10-year Treasury note fell 13/32 in price to yield 2.8904 percent.
The dollar rallied to a more than five-year high against the yen and rose against the euro, recouping initial losses following the decision. Oil prices extended gains, as did gold.
Scott Clemons, chief investment strategist for Brown Brothers Harriman Wealth Management, said the change was modest and indicated the Fed is no rush to remove all stimulus.
"The Fed is using a very careful language that they are going to continue to support the economy. That's part of the reason why the stock market is rallying," Clemons said.
Erik Davidson, deputy chief investment officer at Wells Fargo Private Bank in San Francisco, said the Fed's decision removed uncertainty, a good sign for risk assets.
"The reason the market is up as it is is this is 'bad news' investors have been waiting for and is finally out of the way. It is fodder for possibly better markets because it affirms the economy is healing," Davidson said.
The Dow Jones industrial average closed up 292.71 points, or 1.84 percent, to 16,167.97. The S&P 500 rose 29.65 points, or 1.66 percent, to 1,810.65. The Nasdaq Composite added 46.384 points, or 1.15 percent, to 4,070.064.
Supplier Jabil Circuit Inc, whose customers include Apple, on Tuesday forecast results this quarter well below Wall Street estimates, sending its stock down almost 21 percent. Also, China Mobile Ltd said it is still in talks to sell iPhones, a deal investors have expected.
Stocks in Europe rallied. The pan-European FTSEurofirst 300 index of leading regional shares advanced after think-tank Ifo reported German business morale in December was at its highest since April (Frankfurt: B2B.F - news) 2012.
The FTSEurofirst 300 rose 0.86 percent to close at 1,259.06, and the euro zone's blue-chip Euro STOXX 50 index jumped 1.13 percent to 2,975.09.
German bonds initially rose after news that Germany plans to cut debt issuance to the lowest level since 2007 next year. But gains were limited as investors awaited the Fed's decision.
German Bund futures settled down 15 ticks at 140.14, after earlier rising as high as 140.49.
The euro fell 0.54 percent at $1.3691, while the dollar rose 1.36 percent against the yen to 104.06 yen.
Brent crude oil futures shrugged off the Fed's decision to begin tapering, maintaining gains that widened its premium to U.S. crude.
Brent crude rose $1.19 to settle at $109.63 a barrel. U.S. oil settled up 58 cents at $97.80 a barrel.
U.S. gold futures for February delivery settled up $4.90 an ounce at $1,235.