* 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 pricesrose on Friday after the U.S. government said the economy grewat its briskest pace in nearly two years, while the euro heldsteady, paring earlier losses after Standard & Poor's strippedthe European Union of its triple-A credit rating.
Gold prices rebounded from a six-month low, but were ontrack for the biggest annual loss in more than three decades, asinvestors dumped the precious metal after the U.S. FederalReserve decided to reduce its bond purchases.
The Fed's move on Wednesday to taper its $85 billon monthlybond purchases in January also weighed on U.S. government debtprices, which in turn bogged down their German counterparts,sending the 10-year Bund yield to its highest level sincemid-October.
The Commerce Department reported that the U.S. economy grewat a 4.1 percent annual rate in the third quarter, a sharpupward revision from the prior growth estimate of 3.6 percent. The data improved investors' outlook oncorporate profits and confidence about owning stocks and otherrisky assets for 2014.
"Maybe it's not going to impact the fourth quarter but itcan certainly lift 2014. The consensus is moving that way, weare looking towards improved economic strength as we move into2014," said Tim Ghriskey, chief investment officer of SolarisGroup in Bedford Hills, New York.
The S&P 500 index was set for its biggest weekly gain in twomonths, and the Dow Jones Industrial average hit record highs.The FTSEurofirst 300 index of top European shares waspoised for its biggest rise in eight months.
Investors also grew more comfortable with the Fed's modestcut in stimulus, with the U.S. central bank's signal thatinterest rates were likely to stay low for longer.
"Despite the cut, the Fed is still injecting $75 billion amonth in liquidity, which will continue to support equitiesgoing forward," said David Thebault, head of quantitative salestrading at Global Equities in Paris.
On Wall Street, the Dow Jones industrial average wasup 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, at1,817.65. The Nasdaq Composite Index was up 29.30points, or 0.72 percent, at 4,087.44.
Earlier, Toyko's Nikkei index closed up 0.07percent.
In contrast to the run-up in stocks, most commodity pricesmelted down in the immediate aftermath of the Fed's taperingmove, 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 formonetary policy ... we are in an environment where we are goingto need a much bigger problem in the world than we foresee forgold to recapture any of its luster," Andrew Cole, an investmentmanager 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 ontrack to lose 28 percent on the year.
The oil market has held up against the broader pessimism oncommodities.
Brent crude oil rose more than $1 above $111 abarrel, heading for a weekly gain, boosted by a positive outlookfor 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 percentagainst the dollar at $1.3686 after hitting an earlier low of$1.3626.
Standard & Poor's on Friday cut its supranational long-termrating on the European Union to AA-plus from AAA, citing risingtensions on budget negotiations and following cuts to theratings of member states in recent months.
The dollar weakened against the Japanese yen on lowerU.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 waslittle changed at 1.875 percent after hitting 1.906 percentearlier.
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