European shares rose Friday while the euro held onto modest gains as investors bought beaten-down riskier assets, with markets focused on whether debt-laden Italy could implement tough austerity measures crucial to avoid a euro zone meltdown.
Italy's Senate is due to vote on Friday on the austerity measures demanded by the European Union, while a new emergency government is expected within days, ending the reign of Prime Minister Silvio Berlusconi.
Italy has overtaken Greece as the main focus of the euro zone debt crisis this week, with yields on its benchmark 10-year bonds having risen as far as 7.5 percent, to what are considered unsustainable levels. Analysts fear Italy's potential inability to fund itself could be a systemic risk given the size of its economy and its debt market.
The FTSEurofirst 300 <.FTEU3> index of top European shares was up 0.5 percent at 968.08 points after falling in the previous two sessions. Banks featured among the top gainers, with the sector index <.SX7P> up 1.1 percent.
Sentiment was also supported by a rally on Wall Street where stocks rose nearly 1 percent on Thursday, after drugmaker Merck & Co cheered investors by raising its dividend and network equipment maker Cisco Systems reported earnings that beat analysts' expectations. <.N>
Keith Bowman, an equity analyst at Hargreaves Lansdown said the political change in Italy was helping.
In the background, supportive U.S. economic data and a broader conclusion that the third quarter corporate results season was by no means a disaster also appears to be playing its part, he added.
The MSCI index of global shares was up 0.5 percent at 301.69, recouping some of its losses made in the past two sessions.
The prospect of Italy buckling under its 2 trillion euros of debt has raised concerns over Europe's two-year-old crisis to a new level, because the euro zone's bailout fund does not have enough firepower to rescue the bloc's third largest economy.
Reported steady bond purchases by the European Central Bank have helped bring down yields on Italian bonds, but most traders said the euro zone was still in crisis mode. While ECB buying and positive political developments were helpful, analysts are skeptical they will be enough to spur a sustained drop in Italian bond yields or a rise in the euro.
The euro was slightly higher on the day, changing hands at $1.3646 and staying above a one-month low of $1.3484 touched on Thursday. For the week, the euro is still down about 1.5 percent.
Euro, to me, is still very much a sell on rallies, said Mitul Kotecha, head of global foreign exchange strategy for Credit Agricole CIB in Hong Kong, adding that his bank's forecast was for the euro to drop to $1.33 by year-end.
I still think it's going to be some time before we see a sustained drop in Italian bond yields, he added.
Commodity markets were mostly firmer, with spot gold headed for a third week of gains, its longest winning stretch in more than two months. Brent crude was steady near $114, poised for a third week of increases, while copper snapped five days of declines.
(Additional reporting by Atul Prakash and Masayuki Kitano in Singapore; Editing by Catherine Evans)