Global stocks posted their strongest gains in three weeks and the euro rose on Tuesday on signs of improved economic prospects in Germany and the United States as well as a better-than-expected Spanish debt auction.
U.S. stocks jumped, led by materials and energy shares as commodity prices also rallied. Wall Street also got a boost from
a 1-1/2 year high in housing starts and permits for future construction that suggested the housing market was starting to recover.
Still, traders were cautious about developments that could add to Europe's financial crisis, while the thin trading volume near year's end was expected to keep markets volatile.
Anything that qualifies as a positive datapoint in Europe has an outsized positive reaction in global markets, said Jim Russell, regional investment manager for U.S. Bank Wealth Management in Cincinnati.
Dealing with the debt crisis is a two steps forward, one step back process for Europe, with Tuesday a clear move forward, he said.
Markets have hinged on European headlines for months, as an escalating sovereign debt crisis threatens to take down the bloc's economy.
Defying weak expectations, German business morale rose sharply in December, underscoring the resilience of Europe's biggest economy.
The euro gained about 0.6 percent to $1.3086, but it was down from a session high of $1.3131.
Growing expectations that European banks will borrow a large amount from the European Central Bank at its inaugural three-year offer on Wednesday and invest some of the money by purchasing debt also supported the single currency.
But skeptics abound.
We think perhaps this is wishful thinking on the part of the marketplace, said U.S. Bank's Russell.
The best part of the three-year funding agreement via the ECB is basically to provide liquidity as opposed to a carry trade kind of issue, he said.
Global stocks as measured by MSCI climbed 2.2 percent to their best performance since November 30, while the European benchmark FTSEurofirst 300 <.FTEU3> closed 2 percent higher.
In afternoon trading in New York, the Dow Jones industrial average <.DJI> rose 290.81 points, or 2.47 percent, to 12,057.07. The S&P 500 Index <.SPX> gained 30.95 points, or 2.57 percent, to 1,236.30. The Nasdaq Composite <.IXIC> jumped 71.29 points, or 2.83 percent, to 2,594.43.
On Wall Street, networking stocks advanced after AT&T Inc
KEY YIELDS DROP IN EUROPE
Italian and Spanish bond yields fell, with investors hoping banks will borrow significant amounts of three-year funds from the ECB later this week and spend some of the money on higher-yielding debt.
But with Europe's banks being urged by regulators to reduce 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.
Italian 10-year government bond yields were about 21 basis points lower at 6.658 percent. Equivalent Spanish paper fell 11 bps to 5.147 percent.
The improved performance of Europe's weaker sovereigns hurt U.S. debt.
The Treasury market continues to take its main cues from Europe, said Justin Lederer, interest rate strategist at Cantor Fitzgerald in New York.
Safe-haven U.S. Treasuries fell in price, with the benchmark 10-year note down 27/32, with the yield at 1.9025 percent, compared with 1.82 percent on Monday.
In the oil market, Brent and U.S. crude futures rose more than 3 percent on the weaker U.S. dollar and threats to supply from Central Asian oil producer Kazakhstan and sanctions-hit Iran.
Copper prices rose 2.3 percent and the Reuters/Jefferies commodity index <.CRB> gained 1.8 percent.
(Reporting by Rodrigo Campos; Additional reporting by Ellen Freilich; Editing by Kenneth Barry and Jan Paschal)