(Reuters) - Stocks and the euro rose on Tuesday on signs of improved economic prospects in Germany and a better than expected Spanish short-term debt auction, but concerns about the euro zone debt crisis kept a lid on gains.
U.S. stock index futures pointed to a higher open on Wall Street.
Key to the improved sentiment was a survey from the Munich-based Ifo think-tank that found German business morale rose sharply in December, defying expectations it would decline and underscoring the resilience of Europe's biggest economy.
The numbers show confidence that the German economy will not collapse. The first and second quarters of 2012 will be weak but we expect the German economy to pick up in the course of the year, said analyst Rainer Sartoris at HSBC Trinkaus.
Important for the rest of the euro zone were signs it was consumer demand and domestic construction that have improved, said Klaus Abberger, the survey's coordinator.
The euro gained about 0.5 percent to $1.3065 and moved away from Monday's low of around $1.2983. The single currency hit an 11-month low of $1.2944 last week.
Growing expectations that European banks will borrow a large amount of funds from the ECB at its inaugural three-year tender on Wednesday and invest some of the money on buying peripheral debt also supported the currency.
The FTSEurofirst 300 finance/markets/index?symbol=gb%21FTPP>.FTEU3 index of top European shares was up 0.25 percent in choppy pre-holiday 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 0.75 percent following a near 9 percent drop in two weeks.
The MSCI world equity index .MIWD00000PUS was up around 0.3 percent, although it remains down over the past month and on track to see around a 12 percent loss for the year.
In U.S. markets, concerns about exposure to the euro zone crisis dragged stocks lower on Monday. Bank of America Corp's (BAC.N) stock price fell below $5 for the first time in nearly three years.
SPANISH AUCTION A TONIC
Investor sentiment in the euro zone government debt market picked up after Spain's financing costs fell sharply at an auction of new three- and six-month Treasury bills.
Analysts said part of the reason was that banks were planning to tap the three-year ECB liquidity offer 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.
But with Europe's banks being urged by regulators to de-risk, raise capital and keep lending to business, some lenders may be more tempted to use the fresh funds to 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.
Italian and Spanish bond yields fell on the hopes. Italian 10-year government bond yields were about 17 basis points lower at 6.69 percent, narrowing the difference over safe-haven German Bunds to 477 basis points. Equivalent Spanish paper fell 11 bps to 5.14 percent.
In other moves aimed at easing the debt turmoil, euro zone ministers agreed on Monday to boost crisis-fighting resources at the IMF by 150 billion euros, 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 all the debt problems.
European Central Bank President Mario Draghi told the European Parliament on Monday risks to financial stability in the euro zone increased considerably in the second half of this year, largely due to contagion effects from the debt crisis and bank funding strains.
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.
In the oil market, Brent crude futures rose above $105 a barrel, lifted by the upbeat German economic data and the risk of supply disruptions from Central Asian oil producer Kazakhstan and sanctions-hit Iran.