* S&P 500 stock index set for best week in two months
* European shares head for best week in 8 months
* Euro recovers after falling on S&P cut to EU debt rating
* Gold heads for biggest annual loss in 32 years
By Richard Leong and Blaise Robinson
NEW YORK/LONDON, Dec 20 (Reuters) - Wall Street stock prices rose on Friday after the U.S. government said the economy grew at its briskest pace in nearly two years, while the euro held steady, paring earlier losses after Standard & Poor's stripped the European Union of its triple-A credit rating.
Gold prices rebounded from a six-month low, but were on track for the biggest annual loss in more than three decades, as investors dumped the precious metal after the U.S. Federal Reserve decided to reduce its bond purchases.
The Fed's move on Wednesday to taper its $85 billon monthly bond purchases in January also weighed on U.S. government debt prices, which in turn bogged down their German counterparts, sending the 10-year Bund yield to its highest level since mid-October.
The Commerce Department reported that the U.S. economy grew at a 4.1 percent annual rate in the third quarter, a sharp upward revision from the prior growth estimate of 3.6 percent. The data improved investors' outlook on corporate profits and confidence about owning stocks and other risky assets for 2014.
"Maybe it's not going to impact the fourth quarter but it can certainly lift 2014. The consensus is moving that way, we are looking towards improved economic strength as we move into 2014," said Tim Ghriskey, chief investment officer of Solaris Group in Bedford Hills, New York.
The S&P 500 index was set for its biggest weekly gain in two months, and the Dow Jones Industrial average hit record highs. The FTSEurofirst 300 index of top European shares was poised for its biggest rise in eight months.
Investors also grew more comfortable with the Fed's modest cut in stimulus, with the U.S. central bank's signal that interest rates were likely to stay low for longer.
"Despite the cut, the Fed is still injecting $75 billion a month in liquidity, which will continue to support equities going forward," said David Thebault, head of quantitative sales trading at Global Equities in Paris.
On Wall Street, the Dow Jones industrial average was up 64.86 points, or 0.40 percent, at 16,243.94. The Standard & Poor's 500 Index was up 8.05 points, or 0.44 percent, at 1,817.65. The Nasdaq Composite Index was up 29.30 points, or 0.72 percent, at 4,087.44.
Earlier, Toyko's Nikkei index closed up 0.07 percent.
In contrast to the run-up in stocks, most commodity prices melted down in the immediate aftermath of the Fed's tapering move, but on Friday they showed signs of stabilizing.
Gold rebounded after hitting a six-month low. It was still on course for its largest annual loss in 32 years.
"If you look at the global economy and the outlook for monetary policy ... we are in an environment where we are going to need a much bigger problem in the world than we foresee for gold to recapture any of its luster," Andrew Cole, an investment manager with Baring Asset Management, said.
Gold last traded up 1.2 percent at $1,203.91 an ounce , shaving its weekly decline to 3 percent but still on track to lose 28 percent on the year.
The oil market has held up against the broader pessimism on commodities.
Brent crude oil rose more than $1 above $111 a barrel, heading for a weekly gain, boosted by a positive outlook for fuel demand in the United States and reduced Libyan supply. U.S. oil futures were down 6 cents at $98.98.
In the currency market, the euro was up 0.2 percent against the dollar at $1.3686 after hitting an earlier low of $1.3626.
Standard & Poor's on Friday cut its supranational long-term rating on the European Union to AA-plus from AAA, citing rising tensions on budget negotiations and following cuts to the ratings of member states in recent months.
The dollar weakened against the Japanese yen on lower U.S. bond yields.
The yield on the benchmark 10-year Treasuries note was down 2 basis points at 2.905 percent.
The 10-year German government note yield was little changed at 1.875 percent after hitting 1.906 percent earlier.