(Reuters) - World stocks rose from last week's 7-week low on Monday and the cost of insuring euro zone government bonds against default fell broadly as hopes grew that euro zone leaders would unveil fresh measures to resolve the two-year-old debt crisis.
However, a warning by Moody's that the rapid escalation of the region's sovereign and banking crisis threatens the rating of all European government bonds and caution ahead of next week's key European summit capped gains on the euro and top-rated German bond yields.
Kicking off a mini rally in world stocks after 10 consecutive days of losses was an unsourced report in Italian daily La Stampa. It suggested the International Monetary Fund was preparing a rescue plan for Italy worth up to 600 billion euros ($796 billion). This was later dismissed by an IMF spokesperson.
The IMF report was denied and this brings the market's focus back to how critical a stage the sovereign debt crisis is at, said Jane Foley, senior currency analyst at Rabobank.
The euro looks very vulnerable in a week where there is an awful amount of supply from euro zone countries. Trade will be directional and will be based on how the response is to these auctions.
MSCI world equity index .MIWD00000PUS gained 1.5 percent. The index is down nearly 15 percent since January and more than 22 percent since hitting a three-year high in May.
European stocks .FTEU3 and emerging stocks .MSCIEF both rose around 2 percent.
U.S. stock futures were up 2.75 percent, pointing to a firmer open on Wall Street later.
The market was also expected to get some support from news that U.S. retailers racked up a record $52.4 billion in sales over the Thanksgiving weekend, a 16.4 percent jump.
U.S. crude oil gained 3.7 percent to $100.33 a barrel.
Bund futures fell 35 ticks.
Hopes for resolution pressured credit default swaps. Five-year Italian CDS fell 23 basis points on the day to 532 bps, according to provider Markit, meaning it now costs 532,000 euros to insure an exposure of 10 million euros worth of Italian debt. Belgian, Spanish, French and German CDS also fell.
After the Italian aid report, Italian/German 10-year government bond yield spread tightened 10 basis points to 496 bps.
The premium investors pay to hold Belgium's 10-year government bonds rather than German debt fell 13 bps from Friday to 357 bps even after a downgrade in Belgium's credit rating on Friday.
Belgian borrowing costs have increased sharply in past weeks as the country has struggled to set up a government, with the country's benchmark 10-year yield rising near the 6 percent level on Friday, beyond which financing costs could become unsustainable.
A sustained rise in yields is likely to scare some of the long-term euro bond buyers. Kokusai Asset Management, Japan's biggest mutual fund, said it had sold all its Italian, Spanish and Belgian bond holdings, spooked by a jump in Italian bond yields to above 7 percent and other signs that the crisis in Europe was deepening [ID:nL4E7MS152].
Investors will keep a close eye on developments in the euro zone. Documents showed detailed operational rules for the region's bailout fund were ready for approval and will clear the way for the 440 billion euro facility to attract cash from private and public investors in coming weeks.
Officials say Germany and France are exploring ways for rapid fiscal integration among euro zone countries.
Germany's original plan was to get all 27 countries on board, but officials have been looking at alternatives such as an agreement among just the euro zone countries or a separate agreement outside the EU treaty that could involve a core of around 8-10 euro zone countries.
The euro gained 0.4 percent to $1.3375.
The dollar .DXY fell more than 1 percent against a basket of major currencies.