European shares and the euro rose on Tuesday on surprisingly good news about the German economy and a better-than-expected outcome at a Spanish treasury bill auction, but concerns about the euro zone debt crisis limited gains.
The Munich-based Ifo think-tank said German business sentiment rose sharply in December, defying expectations it would decline and underscoring the resilience of Europe's biggest economy.
The business climate in retailing and domestic construction has improved, said Klaus Abberger, the survey's coordinator.
At the moment I don't think we (Germany) will fall into recession again.
The euro was up about 0.6 percent to $1.3080 and away from Monday's low of around $1.2983. The single currency hit an 11-month low of $1.2944 last week.
Sentiment remains fragile towards the euro, said Simon Derrick, head of currency research at Bank of New York Mellon.
You just need another piece of bad news and the euro will be nudging closer to its 2011 lows, he said.
The FTSEurofirst 300 <.FTEU3> index of top European shares was up 0.5 percent at 962.14 points in choppy trade, following a 4.3 percent slide over the past two weeks. The euro zone's blue chip Euro STOXX 50 <.STOXX50E> index was up 0.8 percent at 2,221.36 points, following a near 9 percent drop in two weeks.
However, the MSCI world equity index <.MIWD00000PUS> was around 0.25 percent higher after starting flat.
SPANISH AUCTION LIFTS SENTIMENT
Investor sentiment in the euro zone government debt market picked up after Spanish short-term financing costs were seen to fall at an auction of new three- and six-month Treasury bills.
Analysts said part of the reason was that banks were planning to tap a three-year liquidity offer from the European Central Bank on Wednesday to pay for the relatively high-yielding paper.
For the first time the ECB plans to offer banks unlimited amounts of low-cost, three-year funds against collateral now defined more broadly, which some hope will encourage buying of high-yielding Spanish and Italian bonds.
However, with Europe's banks being urged by regulators to de-risk, raise capital and keep lending to business, others believe they may be reluctant to invest in sovereign bonds and instead repay their own debts and boost their balance sheets.
A Reuters poll showed euro zone banks were expected to snap up 250 billion euros at the tender, although forecasts ranged from 50 to 450 billion euros, indicating a high degree of uncertainty.
In other developments aimed at easing the debt crisis, euro zone ministers agreed on Monday to boost the IMF's resources by 150 billion euros to help tackle the region's two-year old debt crisis, but it was unclear if the bloc would reach its overall 200 billion euro target after Britain bowed out.
The increase in IMF resources was seen as a vital part of steps by Europe to prevent the crisis from spinning out of control given worries that the region's scheduled permanent bailout fund is too small to handle the debt problems.
European Central Bank President Mario Draghi also told the European Parliament on Monday that the ECB's purchases of peripheral debt were temporary, disappointing investors who were hoping for further bond buying that would keep yields stable.
Italian and Spanish bond yields fell on the hopes that banks will borrow a large amount of three-year funds from the ECB and buy the higher-yielding bonds issued by the two countries.
Italian 10-year yields fell around 18 basis points to 6.67 percent, narrowing the differential with safe-haven German bunds.
Reuters Insider Ifo show: http:/link.reuters.com/map65s
German IFO vs. GDP http:/link.reuters.com/bum65s
Euro zone crisis in graphics: http:/r.reuters.com/hyb65p
Earlier the mood in Asian markets was still risk-averse, after the death of North Korean leader Kim Jong-il raised fears of regional instability, though share markets recovered much of Monday's losses.
Tokyo's Nikkei share average <.N225> ended up 0.5 percent, moving away from Monday's three-week low<.T>, while South Korea's benchmark index <.KS11> outperformed with a 0.7 percent rise, after plunging as much as 5 percent on news of Kim's death. <.KS11>
Market players said thin pre-holiday trade may exaggerate price swings, but further heavy selling was unlikely until there was another catalyst, such as European sovereign ratings cuts.
In the oil market Brent crude futures rose to around $104.85 a barrel, lifted by the risk of supply being disrupted from Central Asian oil producer Kazakhstan while sanctions-hit Iran struggles to maintain production and Libyan output is delayed.
(Additional reporting by Anirban Nag; Editing by Catherine Evans)