Financial markets on Monday greeted the appointments of technocratic leaders in Italy and Greece with cautious optimism, boosting stocks.

Italian bonds, which were hammered last week in the latest phase of the euro zone debt crisis, eased away from crisis levels, although a big test lay ahead with the sale of 3 billion euros of five-year government bonds.

The euro fell, however, after getting a boost in Asian trading.

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.

World stocks as measured by MSCI <.MIWD00000PUS> were up 0.2 percent, leaving them around 7 percent down for 2011.

In Europe, shares extended the previous session's sharp rally. The FTSEurofirst 300 <.FTEU3> index of top European shares was up 0.2 percent after rising 2.2 percent on Friday on political progress in Italy.

Italy's FTSE MIB <.FTMIB> was up 1.5 percent.

Banks <.SX7P>, many of which are highly exposed to Italy and Greece and have suffered this year on the region's debt crisis, were 0.9 percent higher and featured among Europe's the top gainers.

AUCTION AWAITED

The euro opened firmer in Asia, but then slipped in Europe.

The common currency was at $1.3732, having risen as high as $1.3811 in early trade. It was a quarter of a percent lower than its New York close on Friday.

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.

On bond markets, the spread between 10-year Italian government bond yields and their German equivalent fell as the appointment of Monti eased pressure.

The yield on 10-year Italian bonds was around 6.4 percent, still high but well off the crisis levels above 7 percent hit last week.

(Additional reporting by Atul Prakash; Editing by Toby Chopra)