* Mixed US housing data takes edge off stock rally
* MSCI world share index retreats after hitting 4-1/2 year high
* Oil falls on Saudi move to bolster supplies
* Dollar edges higher on perceived strength in housing data
By Herbert Lash
NEW YORK, Feb 20 (Reuters) - Global equity markets faltered on Wednesday as a mixed reading of U.S. housing data took the edge off this year's stock rally, while oil prices fell as the prospect of increased Saudi supply offset optimism spurred by an improving worldwide economy.
A measure of world shares rose above a peak set in May 2011 to trade at highs last seen 4 1/2 years ago, before paring gains. Investors were cautious with minutes from the Federal Reserve's most recent meeting due for release later in the day.
Global equity markets have surged over the last seven months as major central banks repeatedly delivered monetary support to weak economies.
MSCI's all-country world equity index hit a session high of 359.37 before paring gains to trade at 358.21, 0.04 percent higher on the day.
Wall Street was mostly lower and the FTSEurofirst 300 index index of top European shares was down 0.15 percent at 1169.96. The benchmark S&P 500 has gained more than 7 percent so far this year, giving some investors pause.
U.S. residential construction fell in January but a jump in permits for future home building to a 4-1/2 year high offered hope the housing market recovery remains on track.
"Any sustained recovery will continue to be underpinned by a recovery in housing, and the building permits suggests a slow, grinding recovery. There will be fits and starts, but the general trend is a positive slope, which bodes well for the market," Steven Baffico, chief executive officer at Four Wood Capital Partners in New York.
The Dow Jones industrial average was up 7.22 points, or 0.05 percent, at 14,042.89. The Standard & Poor's 500 Index was down 3.25 points, or 0.21 percent, at 1,527.69. The Nasdaq Composite Index was down 5.98 points, or 0.19 percent, at 3,207.62.
The Dow edged higher on gains by Boeing Co, which has found a way to fix battery problems on its grounded 787 Dreamliner jets, a source familiar with the U.S. company's plans told Reuters.
Boeing shares rose 1.8 percent to 76.01.
Saudi Arabia, the world's top exporter of crude oil, expects to raise its output in the second quarter to satisfy higher demand from China and drive economic recovery elsewhere, oil industry sources said, but the exact rise in volume was unclear.
April Brent crude futures were 66 cents down at $116.86 a barrel after posting their first gain in four sessions on Tuesday. U.S. crude fell 81 cents to $95.85. The contract expires later on Wednesday.
U.S. Treasury debt prices eased, tracking falls in German bonds after a weak auction, although the market was seen range-bound before the release of minutes of the Federal Reserve's January policy meeting later in the day.
The benchmark 10-year U.S. Treasury note was down 1/32 in price to yield 2.0295 percent.
The dollar edged higher against the yen on the perception the data showed an overall improvement in the U.S. housing market.
The housing report's impact on the dollar-yen rate was a bit of a surprise as it has been driven by Japanese monetary policy despite major U.S. data over the past few months.
The yen gained on Tuesday on a potential rift between Japanese Prime Minister Shinzo Abe and Finance Minister Taro Aso with respect to foreign bond purchases. Aso said he was not considering foreign bond buying, while Abe had indicated that was an option.
The euro trimmed losses against the dollar to trade little changed on the day at $1.3373.
Against the yen, the dollar fell as low as 93.11 yen after Abe's remarks, before recovering to trade at 93.74 yen, up 0.2 percent on the day, helped largely by the U.S. housing data.
The decline in U.S. housing was due to the more volatile multi-family component, analysts said, while the single-family category rose to its highest since July 2008.
"Housing starts may have missed but they are still relatively high compared to where we are in the cycle," said Brian Kim, currency strategist, at RBS Securities in Stamford, Connecticut.
"Overall, I would say, housing starts and building permits were generally constructive."