The euro fell in a choppy session on Monday as uncertainty in Italy fuelled concern the euro zone's third-biggest economy would be sucked deeper into the region's debt crisis, while gold rose on its safe haven appeal.
U.S. stocks edged higher in unusually low volume and lifted global equities, with most gains coming from healthcare and telecommunications, so-called defensive sectors.
Italian Prime Minister Silvio Berlusconi defied heavy pressure to resign from a rebellion in his party. He denied reports that he would resign, reversing an upward move in Italian stocks and a pullback in government bond yields.
Volatility has risen and markets have hinged on European headlines for weeks, with political wrangling in Greece sparking panic in global markets of a default and possible contagion spreading to other countries.
But the focus is shifting to Italy's deficit. With borrowing costs soaring and 1.9 trillion euros in public debt, the country is too large to bail out.
Italian debt levels exceed the total borrowing of Spain, Portugal, Ireland and Greece combined. Therefore, the Italian problem is truly the core problem for the entire structure of the euro zone, said Andrew Busch, senior currency strategist at BMO Capital Markets in Chicago.
The euro zone crisis has lifted bond yields in most economies in the area. It also hit the euro and strengthened the U.S. dollar, weighing on commodity prices and related equities.
Volatility contagion increased between equities and sovereign debt, according to Mandy Xu, equity derivatives strategist at Credit Suisse in New York.
The volatile spillover impact from sovereign debt is now approaching the highs we saw in July during the second Greek bailout discussion.
The euro was down 0.45 percent at $1.3773 after hitting a low of $1.3679 overnight, according to Reuters data.
Gold futures rose 2 percent as investors piled into the traditional safe-haven on uncertainty about Europe.
Benchmark Italian government bond yields brushed 6.7 percent, their highest since 1997. Borrowing costs of 7 percent or more are widely viewed as unsustainable.
On Wall Street, the Dow Jones industrial average <.DJI> added 85.15 points, or 0.71 percent, to 12,068.39. The S&P 500 <.SPX> gained 7.89 points, or 0.63 percent, to 1,261.12. The Nasdaq Composite <.IXIC> rose 9.10 points, or 0.34 percent, to 2,695.25.
About 6.56 billion shares traded on the New York Stock Exchange, NYSE Amex and Nasdaq, about 18 percent below the year's average of 8.03 billion.
A paper prepared by the European Investment Bank for European finance ministers helped buoy equities, as it said the EIB could provide up to 74 billion euros of lending support to European banks over two years if its capital base were reinforced in part with cash from shareholders.
European banks' liquidity issues are seen as a key element in the current crisis.
The FTSEurofirst <.FTEU3> closed 0.55 percent lower, while U.S.-dollar denominated Nikkei futures edged 0.5 percent higher. The MSCI world equity index <.MIWD00000PUS> was up 0.2 percent.
U.S. 30-year Treasury bonds were 14/32 of a point higher to yield 3.07 percent, helped by safe-haven demand for U.S. government debt. The yield hit a session low of 3.01 percent.
Benchmark 10-year Treasury notes were trading 6/32 higher in price to yield 2.018 percent, up from a session low of 1.961 percent.
(Reporting by Rodrigo Campos; additional reporting by Wanfeng Zhou and Angela Moon; Editing by Kenneth Barry)