World stocks rose from a two-week low on Wednesday and the euro rebounded across the board after Germany's top court rejected lawsuits aimed at blocking Germany's participation in bailout packages for Greece and other euro zone countries.
The Constitutional Court also handed the country's parliament a greater say over euro zone bailouts, potentially hampering Berlin's ability to act decisively against a two-year debt crisis.
But it at least cleared the way for Germany to contribute more to the euro zone's rescue fund, giving temporary relief to investors after this week's sharp sell-off in risky assets.
Better-than-expected data on the U.S. services sector and Australian growth as well as speculation that Washington may unveil a $300 billion package to create new jobs also helped improve the mood.
Today's ruling should bring some relief to financial markets as a total chaos scenario has been avoided but it should not lead to euphoria, said ING economist Carsten Brzeski.
The ruling confirms our view that the German piecemeal approach on the debt crisis is not likely to change but eventually the German parliament will vote in favor of a second Greek bailout package and the beefed-up EFSF.
MSCI world equity index <.MIWD00000PUS> rose 1.3 percent after hitting its lowest since Aug 22 on Tuesday. The benchmark index is still down more than 10 percent.
European stocks <.FTEU3> gained 2.4 percent, having hit a two-year low in the previous day.
Emerging stocks <.MSCIEF> added 1.9 percent.
U.S. crude oil rose 1.2 percent to $87.09 a barrel.
IMF Managing Director Christine Lagarde has called for governments to consider recapitalizing banks and adjusting budget austerity drives to support growth, the concerns at the center of market weakness since late July.
Sources told Reuters G7 finance ministers will discuss measures at a summit at the end of the week and CNN on Wednesday cited Democratic sources saying that U.S. President Barack Obama plans to lay out a job-creation package on Thursday with new spending offset by budget cuts.
Bund futures fell 75 ticks, tracking a dip in U.S. Treasuries after the CNN report.
The dollar <.DXY> gained 0.7 percent against a basket of major currencies.
The euro rose 0.8 percent to $1.4100, after falling as low as $1.3971 on Tuesday.
There's been a lot of pessimism priced into the market this week but we're grinding through the worst of it so understandably we've had a mini pull-back here, said Nomura rate strategist Sean Maloney. But event risk remains high and we expect more pitfalls to come.
The Swiss franc, which had been along with gold the safe haven of choice for investors, held below 1.2000 per euro, a day after the Swiss central bank set an exchange rate cap to weaken the franc and prevent a recession.
The dollar lost half a percent to 77.16 yen.
The Bank of Japan kept its policy settings unchanged and maintained its assessment that the economy was steadily picking up, with output and exports nearly returning to levels before a devastating earthquake and tsunami in March tipped Japan into recession.
(Additional reporting by Kirsten Donovan; editing by Patrick Graham)