European stocks rallied on Friday and the euro climbed against the dollar and the yen as investors cheered solid readings of economic growth in euro zone countries and a stellar performance in Germany.

Data showing the German economy grew by 2.2 percent in the second quarter -- dwarfing forecasts for a 1.3 percent rise to post its biggest gain since unification -- suggested the broader euro zone economy is improving despite weakness in some member countries.

Separate figures showed French gross domestic product (GDP) grew by 0.6 percent in the same period, slightly higher than forecasts and adding to 0.2 percent growth in the previous quarter, while Austrian GDP grew 0.9 percent.

The FTSEurofirst 300 index <.FTEU3> rallied roughly 0.5 percent in early trade, while the euro hit the day's high against the dollar after the data on the view the euro zone economy was on a better footing than in the United States.

The data shows that one can indeed build more confidence in sustainable growth in Europe as opposed to the United States, which in my view will extend the outperformance of European markets over the U.S., said Heino Ruland, strategist at Ruland Research in Frankfurt.

Flash euro zone second quarter GDP is due out at 5 a.m. EDT.

The surge in Germany's economy prompted the country's economy minister on Friday to raise its growth outlook for the entire year. In contrast, the Federal Reserve earlier this week acknowledged the U.S. economy's recovery was slowing.

By 0759 GMT, the MSCI world equity index was up roughly 0.5 percent, clawing back after it hit a three-week low the previous day.

The euro climbed 0.4 percent on the day to $1.2880, reversing a slide to $1.2779 on Thursday, its lowest since late July. Gains in the euro helped to push the dollar down 0.4 percent versus a currency basket <.DXY>.


Adam Cole, global head of currency strategy at RBC, said the strong GDP data had sparked some demand for riskier assets, which had tumbled earlier this week on U.S. and global growth concerns.

S&P futures climbed 0.6 percent on the day, while emerging stocks <.MSCIEF> rose 0.6 percent.

Higher risk demand stung bond prices, prodding German government Bund futures down 18 ticks to 131.04.

Still, Cole warned that concerns about fiscal and banking problems in countries on the euro zone periphery may weigh on the shared European currency over the medium term.

The peripherals are still weak, and how the euro trades depends on whether the market focuses on the strong core or the weak peripherals, and the risk is they will focus on the weak, he said.

Despite its broad weakness, the dollar was flat against the yen at 85.96 yen.

The Japanese currency has retreated from a 15-year high of 84.72 per dollar hit earlier this week on speculation that Japanese authorities may enter the market to stem its strength.

After talking down the yen this week, Japan's prime minister and its central bank chief are expected to meet next week to discuss the currency's recent rally against the dollar.

Market players do not expect actual intervention unless the dollar drops near its record low of 79.75 yen, or the trend becomes more volatile.

(Additional reporting by Harpreet Bhal and Tamawa Desai; Editing by Ruth Pitchford)