Signs the euro zone's weak economy may have turned a corner gave a brief lift to the single currency in choppy trading on Tuesday, but worries over the setback in Greek debt talks, seen as vital for avoiding a messy default, weighed on sentiment.
The Markit flash Eurozone Purchasing Managers' Composite Index (PMI), often seen as a growth indicator, jumped to 50.4 from December's 48.3, its highest reading in four months, and easily beating the highest forecast of 49.5 in a Reuters poll.
The index seems to have bottomed out in October and we've had three months of improvement. Three months we see as a turning point signal, and we are beginning to get a bit more confident, said Chris Williamson, chief economist at the data provider Markit.
A reading above 50 indicates economic expansion and below this level, a contraction.
The euro, which had edged lower at the start of trading after Greek debt talks stalled, turned up on the PMI data to hit $1.3603, its highest level since January 4. But soon drifted down to be 0.1 percent lower $1.3010, well above a 17-month trough near $1.2624 hit on January 13.
Although we still see downside risks for activity in early 2012, today's report suggests that the EMU (European Union)economy is not going to fall in a deep recession near-term, Annalisa Piazza, market economist at Newedge said.
Share markets were less impressed by the PMI data and, although the pan-European FTSEurofirst 300 <.FTEU3> index of top shares initially ticked higher, it soon traded down to below its opening levels, to be off 0.8 percent at around 1,039.85 points.
Investors remain nervous about the outlook for the euro zone debt crisis after the region's finance ministers rejected an offer by private creditors to restructure their Greek debt.
The ministers said they could not accept a coupon of 4 percent on new, longer-dated debt expected be issued to Greece's private creditors in exchange for their agreement to write down the nominal value of the debt they hold by 50 percent.
Safe-haven German government bond futures moved down after the PMI data and were about 22 ticks lower on the day at 137.21, a fresh one-month low. Benchmark ten-year German yields were 2 basis points higher at 2 percent.
The German debt market reversed initial gains after PMI data also showed Germany's manufacturing sector grew in January for the first time since September, added to a better outlook for the euro zone.
Euro zone flash PMI http://link.reuters.com/cuh64s
Debt crisis in graphics http://r.reuters.com/hyb65p
European banks in graphics http://link.reuters.com/qux33s
In equity markets, the brighter economic outlook was clouded by results from German conglomerate Siemens
Investors are also growing nervous about the outlook for Portugal, the next weakest euro zone member, whose bond yields have been rising steadily over the past week.
The MSCI world equity index was down about 0.35 percent at 315.16 point after another quiet day in Asia where many markets are still closed for the Lunar New Year holiday.
Risks posed by Europe's debt woes had prompted the Bank of Japan to cut its growth forecasts on Tuesday.
In the commodities markets, Brent crude oil held above $110 as supply concerns rooted in tension between Iran and the West offset fears over demand growth stemming from protracted negotiations over Greece's debt.
Spot gold was steady just below six-week highs at $1,669.30 an ounce as investors await the outcome of a two-day Federal Reserve meeting, which ends on Wednesday, for any signs that interest rates will stay lower for longer, as that could put some pressure on the U.S. dollar.
(Additional reporting by Neal Armstrong; Editing by Catherine Evans/Anna Willard)