* U.S. stocks open higher; MSCI World index down 0.7 pct on Italy vote
* Dollar gains against yen
* Italian bond yields rise by most this year
By Caroline Valetkevitch
NEW YORK, Feb 26 (Reuters) - U.S. stocks rose and the dollar extended gains against the yen on Tuesday after Federal Reserve Chairman Ben Bernanke strongly defended the Fed's bond-buying stimulus.
Bernanke, whose comments came in testimony to Congress, also urged lawmakers to avoid sharp spending cuts set start taking effect on Friday.
Financial markets were rattled last week when minutes of the Fed's January meeting showed some officials were thinking of scaling back its monetary stimulus earlier than expected.
"What Bernanke is saying, bottom line, indicates that there will not be a reversal anytime soon in the stimulus program," said Peter Cardillo, chief market economist at Rockwell Global Capital in New York.
Data showing new U.S. single family home sales hit a four-and-a-half year high in January and consumer confidence rebounded in February also boosted U.S. stocks and the dollar.
But the uncertainty generated by Italy's elections was still rattling most other major risk asset markets. The MSCI world equity index was down 0.7 percent, while the pan-European FTSEurofirst 300 index was down 1.0 percent.
Southern European government bond prices sank. Italy's 10-year bond yields were up as much as half a point to 4.86 percent, their highest since mid-December.
Investors are fearful that the strength of the vote for anti-austerity parties in the election will weaken efforts to reform Italy's public finances and its labor laws, damaging the euro zone's efforts to resolve its three-year old debt crisis.
U.S. FOCUS ON BERNANKE
On Wall Street, the Dow Jones industrial average was up 60.20 points, or 0.44 percent, at 13,844.37. The Standard & Poor's 500 Index was up 0.93 points, or 0.06 percent, at 1,488.78. The Nasdaq Composite Index was down 1.37 points, or 0.04 percent, at 3,114.88.
In the foreign exchange market, the dollar last traded at 92.18 yen, up 0.4 percent on the day. It had been trading at about 91.98 before the data and Bernanke.
The euro last traded at $1.3064, flat on the day. It earlier had been trading at about $1.3108, according to Reuters data.
U.S. Treasuries widened losses after the homesales and consumer confidence data and headlines on Bernanke. The 10-year note yield stood at 1.868 percent, up from 1.86 percent late on Monday. It was down 1/32 in price.