The euro rose and world shares recovered on Tuesday on hopes of a deal this week to free up the next tranche of aid for Greece, though concerns about Portugal following a similar path capped gains and fresh data on the region's economic outlook weighed on sentiment.

The single currency gained after Greek Prime Minister Lucas Papademos said negotiators had made significant progress in talks to strike a restructuring deal on government debt and aimed to have a definitive agreement by the end of this week.

The euro was up 0.35 percent to $1.3170, edging back toward a six-week high of $1.3235 hit last week.

The market is currently keeping aside the various risk factors like the possibility of a Portuguese debt restructuring on hopes of more liquidity injection by the major central banks, said Sebastien Galy, FX strategist, at Societe Generale.

The Greek debt deal is a necessary first step if the country

is to get the bailout money needed to avoid a potentially messy bond default in March. But just as Greece problems move toward a resolution concerns are growing that Portugal might need a second rescue as Lisbon's borrowing costs soar.

It seems the market is pushing Portugal down the same path as Greece, and bond holders are now coming to reality that they may have to write-off some of their Portuguese debt holdings further down the line, Chris Weston, institutional dealer at IG Markets, said.

The pan-European FTSEurofirst 300 <.FTEU3> index of top shares was up 0.5 percent at 1,035.89 points, with banks among the top gainers.

As Greek woes recede and Asian markets extend their strong start to the year the MSCI world equity index, which was up 0.4 percent to 316.98, is on track for a rise of around 5..8 percent in January.

Portugal's 10-year government bond yield were around 17.2 percent after breaking through the 17 percent level on Monday, to reach euro-era highs of around 17.4 percent, stoking the fears that Lisbon may become the next Athens.

Portugal's spread widened but it didn't really spread to other peripherals, so things are still quite contained, said Frances Cheung, Credit Agricole CIB's senior strategist for Asia ex-Japan in Hong Kong.

On the economic front though data continues to show the euro zone crisis heading towards a very weak first quarter.

German retail sales fell unexpectedly in December, suggesting Europe's debt crisis unsettled consumers during key Christmas trade, although economists said they expected the preliminary data to be revised upwards.

Consumer spending in France slumped unexpectedly over the key Christmas shopping period, in a sign consumers are tightening their purse strings as uncertainties over jobs and economic growth weigh.

Elsewhere traders were on watch for intervention by the Bank of Japan to prevent further gains in the yen after the U.S. dollar touched a three-month low during Asian trading.

Gains in Asian stock markets, which have made a strong start to the year, has put pressure on the greenback which fell 0.3 percent against a basket of major currencies to 78.912 <.DXY>.

(Additional reporting by Anirban Nag and Francesco Canepa; editing by Patrick Graham)

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