Demand for Italian bonds in a crucial sale was solid enough to lift European stocks and the euro from their lows on Monday although both remained in negative territory on concerns about the euro zone debt crisis.

Financial markets generally greeted the appointments of technocratic leaders in euro zone debt hot spots Italy and Greece with cautious optimism.

But the arrival of respected economists at the head of two countries under intense pressure over their debt is not the same as actually taking action. So investors sold off early gains in equities and the single currency.

Italy's president appointed former European Commissioner Mario Monti on Sunday to head a new government with the task of restoring market confidence in the euro zone's third-largest economy, whose debt burden is too big for the bloc to bail out.

Meanwhile in Greece, Lucas Papademos, a former European Central Bank vice-president, has been sworn in as prime minister and is under pressure to implement radical reforms.

We have now got two strong characters who are prepared to put public interest ahead of personal interest and they have a lot of goodwill to start with. The challenge for them now is to implement the fiscal austerity and budget reforms, said Mike Lenhoff, chief strategist at Brewin Dolphin.

The closely-watched auction of Italian 5-year bonds was covered 1.49 times, meaning there were buyers. But the gross yield rose to 6.29 percent from 5.32 percent a month ago.

The micro-view is supportive but there's no getting away from the long-term view that this is a significant rise in yields for an Italian five-year auction, said Peter Chatwell, rate strategist at Credit Agricole CIB.

Italy galloped into the euro zone debt storm last week when its 10-year bond yield rose well above 7 percent, the level at which other countries have had to seek bailouts.

That bond was yielding just less than 6.5 percent on Monday.


World stocks as measured by MSCI <.MIWD00000PUS> were flat, more than 7 percent down for 2011.

In Europe, shares fell back from the previous session's sharp rally. The FTSEurofirst 300 <.FTEU3> index of top European shares was down a third of a percent after rising 2.2 percent on Friday on political progress in Italy.

Banks <.SX7P>, many of which are highly exposed to Italy and Greece and have suffered this year on the region's debt crisis, were down 0.1 percent after earlier steaming ahead around 1 percent.

The euro slipped against the dollar. It was down around a third of a percent at $1.3704 after earlier rising as high as $1.3811 with near-term resistance.

It's good that Italy and Greece avoided political vacuums. But we have to see if national unity governments will function, said Katsunori Kitakura, chief dealer at Chuo Mitsui Trust Bank in Tokyo.

(Additional reporting by Atul Prakash; Editing by Stephen Nisbet)