The euro rose to a session high and shares reversed early losses after a key German economic indicator bolstered hopes that Europe's largest economy was recovering and eased debt fears spurred by a Moody's downgrade of six of the region's nations.

Germany's ZEW Indicator of Economic Sentiment suggested the economic recovery, which slowed at the end of last year, is back on track and that analysts are less fearful now about the impact of the region's debt crisis on the growth outlook.

The economic weakness at the turn of the year is starting to look more and more like it was just a mere dent, said Rainer Sartoris, an analyst at HSBC Trinkaus.

A successful bond auction of three-year debt by Italy, where yields fell to their lowest level since March 2011, added to the sense that risk aversion prompted by the Moody's announcement was overdone.

Good auction, pretty much unaffected by yesterday's downgrades from Moody's, said Peter Chatwell, a rate strategist at Credit Agricole CIB.

The euro rose to $1.3205 from around $1.3185 before the ZEW survey was released. German Bund futures sank to a session low of 138.14, down 9 ticks on the day, having stood flat ahead of the release.

The FTSEurofirst 300 index <.FTEU3> turned flat at 1,071.22 points, having traded in the red ahead of the survey release, largely in response to Moody's announcement it may cut the AAA ratings of France, Britain and Austria, while it downgraded Italy, Portugal, Spain, Slovakia, Slovenia and Malta.

The broad MSCI All Country World Index <.MIWD00000PUS> was also virtually flat at 326.61 after Asian shares earlier fell on the Moody's announcement and its warning over the UK, which had previously been seen as something of a safe haven for investors looking to diversify away from the euro zone.

Investors had also become worried about whether the European Union and the International Monetary Fund would judge adequate new austerity cuts approved by the Greek parliament, which are needed to release bailout funds and avoid a chaotic default.


The U.S. dollar strengthened against the yen and Tokyo stocks rose <.n225> when Japan's central bank surprised markets with a further loosening of monetary policy by increasing its asset buying and lending scheme.

Although not expected so soon, the move tallies with easier stances adopted by other major developed world central banks as they seek to support a modest recovery in the global economic outlook and encouraged investors to move into riskier assets like equities.

Cheap loans from the European Central Bank and the prospect of a lot more of this type of funding at the end of the month helped Italy sell 6.0 billion euros of new government at average yields of 3.41 percent, compared with 4.83 percent in mid-January.

(Additional reporting by Anirban Nag; editing by Stephen Nisbet)