World stocks hit a 1-1/2 month high while the euro held near a one-month high on Monday after France and Germany said over the weekend they were making good progress on a plan to resolve the euro zone's debt crisis and recapitalize the region's banks.

Stronger-than-expected earnings from Google on Friday and expectations of more upbeat results in the third-quarter earning season also supported risky assets.

G20 finance ministers and central bankers said at a meeting in Paris that they expected euro zone leaders to decisively address the current challenges through a comprehensive plan at a European Union summit on October 23.

With anticipation for a bold policy initiative running high, investors are preferring to unwind overly pessimistic positions.

This is a correction of the excessive retreat seen during the summer. The worst-case scenario of debt defaults from many euro zone countries, or even of a break-up of the bloc that had been priced in, has been avoided, said Marc Touati, head of economic research at Assya Global Equities.

And this relief rally is not over, when you look at the major gap between market capitalizations and shareholders' equity.

The MSCI world equity index <.MIWD00000PUS> rose 0.8 percent, hitting levels not seen since late August. The index gained 5.4 percent last week, posted its biggest weekly gain since July 2009, and has rebounded nearly 14 percent since hitting a 15-month low earlier this month.

Goldman Sachs , Bank of America and Apple Inc are all due to report third-quarter earnings this week.

European stocks <.FTEU3> rose nearly 1.2 percent while emerging stocks <.MSCIEF> gained 1.6 percent.

U.S. crude oil rose 1 percent to $87.63 a barrel on hopes euro zone leaders will reach an agreement on tackling the debt crisis and help stem a slowdown in oil demand growth.

Bund futures fell 26 ticks.

The euro stood at $1.3861, within half a cent of Friday's high near $1.39.

After the developments at the latest summit, we can assume that at long last concrete measures to solve the crisis will be implemented next weekend, said Sumino Kamei, senior currency analyst, Bank of Tokyo-Mitsubishi UFJ.

But the euro's rally last week was caused mostly by short covering. It will have a hard time going above $1.40 ahead of the EU meeting as contagion fears -- indicated by elevated levels of European bond yields -- are still showing almost no signs of abating.

The dollar <.DXY> was steady against a basket of major currencies.

(Editing by Susan Fenton)

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