World stocks climbed further out of their August hole on Monday, lifted by signs of earlier-than-expected recovery in Japan and a growing belief that shares may now be cheap.

European shares, however, failed to keep early gains and dropped into negative territory.

Gold and the Swiss franc, two of the main beneficiaries of recent global risk aversion, fell.

Investors were also weighing calls by Italian Economy Minister Giulio Tremonti for a more coordinated response to the euro zone debt crisis, including the creation of euro bonds, against an immediate rejection of the idea from Germany.

MSCI's all-country world stock index, a broad measure of global equity health, was up half a percent, ratcheting up roughly a six percent gain since hitting an 11-month low last Thursday.

The markets have been technically very oversold and on that basis alone, they are due for a period of remission from the selling, said Mike Lenhoff, chief strategist at wealth manager Brewin Dolphin.

Bank of America-Merrill Lynch said a buy signal had been triggered last week as outflows out of risky assets hit significant levels.

We note that since 2004, global equities have rallied an average 6.7 percent (in the four weeks that followed the trigger), the bank's strategists wrote in a note.

Nonetheless, the pan-European FTSEurofirst 300 stocks index was slightly lower.

Shares in Asia were boosted by data showing Japan's economy shrank less than expected in April-June following a devastating earthquake and tsunami in March.

Japan's Nikkei closed up 1.37 percent.


The albeit tentative rise in confidence spilled into other assets.

The euro extended its gains against the Swiss franc to more than 3 percent after a Swiss newspaper report said the Swiss National Bank was poised to set a limit for the euro-Swiss franc exchange rate and will use all means to defend it.

The dollar also rallied against the franc, surging 2.7 percent to 0.79883.

Otherwise the U.S. currency was down around a quarter of a percent against a basket of major currencies.

On the euro zone crisis front, Tremonti's call for common euro zone debt issuance was rejected by German Finance Minister Wolfgang Schaeuble, who said such euro bonds would undermine the basis for the single currency by weakening fiscal discipline among member states.

German Chancellor Angela Merkel and French President Nicolas Sarkozy are due to meet in Paris on Tuesday to discuss the crisis.

Core euro zone debt was mixed with yields rising on longer-term bonds.

(Additional reporting by Atul Prakash and Blaise Robinson; Editing by Toby Chopra)