World stocks and commodity prices recovered on Tuesday from the previous session's sell-off, which was prompted by concerns over the pace of global recovery, while the Japanese yen and safe-haven U.S. government bonds eased.
U.S. stocks suffered their worst loss in seven weeks on Monday while Chinese shares saw their biggest daily percentage drop in nine months.
The Shanghai Composite Index <.SSEC> ended 1.4 percent higher on Tuesday, reversing earlier losses after dipping to a two-month low in intraday trade. Japan's Nikkei average <.N225> also closed up.
The drop in China's market had a domino effect on other markets, fuelling worries among some analysts that rallying assets prices have run too far ahead of economic fundamentals and weak earnings prospects.
Many of us hope that the Chinese market will not (be) ... starting a long travel underwater with the rest of the world as its passengers, broker Close Brothers Seydler said in a note.
However, the weak performance of the Shanghai Composite Index in the last days indicates that a correction of an overheated market could be imminent.
The pan-European FTSEurofirst 300 <.FTEU3> index, which tumbled 45 percent last year, has rallied nearly 44 percent from its March floor and is up more than 11 percent this year.
The index rose 0.7 percent on Tuesday, partly aided by expectations that German ZEW investor sentiment figures, due at 0900 GMT, would be positive.
The think tank's monthly survey will rise to 45.0 from 39.5 in July, according to the mid-range forecast in a Reuters poll of 40 analysts.
The MSCI world equity index advanced 0.3 percent after losing nearly 3 percent on Monday -- its biggest one-day percentage loss in four months.
Crude prices rose above $67 a barrel and copper prices gained 1 percent as investors regained a bit of risk appetite.
The VDAX-NEW volatility index <.V1XI>, a gauge of investor risk aversion in Europe, fell 1.9 percent, after soaring 14 percent to hit its highest close in five weeks on Monday.
The higher the volatility index, the lower is investors' appetite for risky assets such as equities.
The yen retreated from its highest levels this month against the dollar and euro and losing ground against commodity-link currencies.
Gains in yen crosses today were a recovery from excessive losses the previous day, rather than investors being actively engaged in risk trading, said Ayako Sera, a market strategist at Sumitomo Trust & Banking.
The dollar gained 0.7 percent to 95.10 yen, but lost ground against the euro, trading at $1.4121.
Yields on benchmark 10-year U.S. Treasuries were up 3 basis points at 3.506 percent, while the 10-year euro zone Bund yield was unchanged at 3.302 percent.
(Additional reporting by Christoph Steitz in Frankfurt and Kaori Kaneko in Tokyo)