European shares rose and the euro pared losses on Wednesday after the head of the European Commission said it would soon present options for the introduction of euro area bonds, offering a glimmer of hope for an easing of the sovereign debt crisis.

Those comments from Jose Manuel Barroso helped reverse earlier losses for the single currency and European stocks due to a downgrade of two big French banks' credit ratings. Common euro zone sovereign bonds are perceived to be part of a solution as it will give weak euro zone states access back to funding in commercial markets.

Barroso's words repeat an earlier pledge from EU officials to make such proposals in October, while Germany, without whose approval the scheme cannot be introduced, remains strongly opposed to the issuance of common euro zone bonds.

Global markets have been roiled since the end of July by the twin fears of a recession in the United States and Europe's protracted debt woes, which have forced Greece, Ireland and Portugal to take bailouts and piled bond market pressure on Italy and Spain.

The crisis has the potential to derail global economic growth. French President Nicolas Sarkozy and German Chancellor Angela Merkel are due to talk with Greek Prime Minister George Papandreou on Wednesday, with investors concerned by the lack of decisive action and increased chances Athens will soon default.

It (Barroso) could be a turning point and a major step forward as countries with higher debt levels will have the ability again to finance themselves, said Klaus Wiener, chief economist at Generali Investments, which manages 330 billion euros ($451 billion).

But if we get euro bonds, there will be some strings attached. There will be strong governance in terms of fiscal prudence otherwise it can not work.

The FTSEurofirst 300 <.FTEU3> index was up 0.3 percent, but the index is down about 20 percent so far this year. Banks remained under pressure, with the European sector index <.SX7P> down 0.66 percent, Societe Generale down 3.8 percent and BNP Paribas down 3.3 percent.


Moody's Investors Service cut its ratings for French banks Credit Agricole and Societe Generale on Wednesday, citing their exposure to Greece.

Confidence in the euro zone was further hit on Tuesday when Italy, where lawmakers vote later on an austerity package at 1800 GMT, was forced to pay the highest interest rates since joining the euro in 1999 to sell 5-year bonds.

Italy is a particular concern because, while Europe's bailout fund can cope with rescuing smaller, peripheral nations, it lacks the financial firepower to save the euro zone's third largest economy.

The euro was down 0.15 percent at $1.3655 against the dollar, but climbing from around $1.3630 before the comments from Barroso.

If pressure continues on bigger countries like Spain and Italy and if there is no help from the Federal Reserve in the form of more quantitative easing there is a risk of euro/dollar settling into a $1.35-$1.30 range, said Roberto Mialich, currency strategist at Unicredit.

German bund futures eased and were last 3 ticks lower at 137.71, pulling back further from a session high of 138.26. The cost of insuring Italian and Spanish debt against default also fell.

(Editing by Toby Chopra)