Signs the European Central Bank is open to changing the way it tackles the region's growing debt crisis lifted the euro and European shares on Wednesday but deepening economic gloom kept a lid on the gains.
Weak corporate earnings also set the stage for a mixed open to trading on Wall Street .N.
The rise in European assets came after ECB Governing Council member Ewald Nowotny said there were arguments for giving Europe's new permanent rescue fund a banking license, enabling it to borrow unlimited central bank money, boosting its capacity to prevent the crisis spreading.
The single currency saw its strongest gains of the month on the comments, rising 0.85 percent to $1.2165, although the outlook remains weak and it is only just above a two-year low of $1.2042 hit on Tuesday.
We take little solace from the fact that one member of the ECB is suddenly working up to the fact that we need a bigger firewall. That argument has been out there for two years, and it's not met with much response yet, said David Page, senior economist at Lloyds Bank.
Granting the fund, the European Stability Mechanism (ESM), a banking license means it could exchange bonds it buys to support highly indebted countries for fresh cash from the ECB, increasing its firepower without additional government funds.
ECB President Mario Draghi has long poured cold water on the proposal and legal problems could also prevent such a move, but Nowotny's comments show the crisis is forcing policymakers to at least consider options they have previously shunned.
Investors are worried that the firepower of the new fund would be quickly exhausted if, as widely expected, Spain needs a full sovereign bailout on top of the rescue deal for its banks.
The pressure on the central bank was also highlighted in its quarterly bank survey which showed fears about the euro zone's future have made companies and other borrowers nervous about taking on credit and investing in their businesses.
The Nowotny comments were enough to end a three-day selloff in European share markets and lifted the FTSE Eurofirst 300 index .FTEU3 by 0.2 percent at 1,020.69 points.
The MSCI world equity index .MIWD00000PUS was little changed at 303.65 points though it has fallen 2.7 percent this week as concerns about the impact of Europe's problems on growth spread across the world.
ECONOMIC GLOOM DARKENS
The gains in the euro and regional equities came in the face of weak economic data from Germany and Britain, which reinforced the view that the European Union's biggest economies were being dragged into the mire of the debt crisis.
German business sentiment dropped in July for the third straight month to its lowest level in over two years, according to the latest survey by the Munich-based Ifo think tank.
The monthly survey of some 7,000 companies, produced an Ifo index reading of 103.3 for this month from a revised 105.2 in June.
Today's Ifo index sends a clear warning that even the most solid ship can capsize in a rough thunderstorm, Carsten Brzeski, senior economist at ING Group said.
With austerity-driven slowdowns coming now also to most other core euro zone countries, an obvious cooling of the Chinese economy and a still not very dynamic U.S. recovery, order books are emptying and companies have started to reduce stocks, he said.
Britain's economy is also suffering heavily from the impact of the euro zone crisis on business and consumer sentiment.
The UK tipped into a second recession within four years at the end of last year, and second-quarter data out Wednesday showed the situation had worsened. ECONGB
The Office for National Statistics said Britain's gross domestic product fell 0.7 percent in the second quarter of 2012 after contracting by 0.3 percent at the start of the year, much worse than forecasts.
The economy looks to be badly holed below the water line at this stage. It's a far worse period of activity than we'd expected, said Peter Dixon, an economist from Commerzbank.
Sterling fell sharply after data, hitting a 12-day low of $1.5469 and pushing the euro to a 6-day high against the UK pound of 78.40 pence.
Worries about Spain's ability to fund itself as it faces rising demands from regional governments for help overcoming spiraling deficits were undiminished but Nowotny comments did ease some of the pressure on Spanish debt.
Ten-year government bond yields eased 10 basis points to 7.54 percent, and equivalent Italian debt yields fell 16 bps to 6.49 percent.
While 10-year German bond yields were higher, rising 6.3 basis points at 1.297 percent, after an auction of bonds maturing in 2044 was met with poor demand.
Greece was also back in the headlines with inspectors from the EU, ECB and International Monetary Fund in Athens to decide whether to keep it hooked up to a 130-billion-euro lifeline or let it go bust.
Three EU officials have said the team was likely to conclude Greece cannot repay what it owes, making a further debt restructuring necessary, but no decision is expected until at least September.
In oil markets Brent crude edged higher on concerns about Middle East supply.
Brent crude added 4 cents to $103.46 a barrel while U.S. crude was up 22 cents to $88.72.
It seems as though all the bad news (for Europe) is priced in, and people are thinking things can't get much worse, said Christopher Bellew, broker at Jefferies Bache.
Gold prices rose in line with the euro, gaining 0.6 percent at $1,589.71 an ounce, while U.S. gold futures for August delivery were up $12.90 an ounce at $1,589.10.
We've had a modest uptick in sentiment this morning with these comments about the banking license for the ESM, but again that kind of market reaction to political commentary can be very easily undone by economic data, which has not been encouraging, Credit Suisse analyst Tom Kendall said.