Trader reacts in front of the DAX board at the Frankfurt stock exchange
A trader reacts in front of the DAX board at the Frankfurt stock exchange REUTERS

European stocks rose Tuesday on a report that Italy may get financial support from China but the euro inched down as markets remained fearful that Europe is sliding into another banking crisis.

World stocks overall also staged a modest recovery, but growing expectations of a Greek debt default, sharp drops in French bank shares on Monday due to their heavy sovereign debt exposure and renewed rises in Italian bond yields meant any rally was likely to be short-lived.

Investors tiptoed back into riskier assets after the Financial Times reported on its Web site Monday that Italy had asked China to make significant purchases of its debt. But another media report said China may not agree to Italy's request, helping reverse initial gains for the euro.

Italy is due to auction up to 7 billion euros of bonds later in the day, including new five-year debt for which it is expected to offer a hefty premium to lure investors.

All this cheer over an Italian bond buyer does risk looking somewhat exaggerated, especially with the threat of a Greek tragedy still looming, so sustaining the rally without any fresh data points will remain something of a challenge, Cameron Peacock, market analyst at IG Markets, told Reuters.

The pan-European share index <.FTEU3> rose more than 1 percent, lifting the MSCI world equity index <.MIWD00000PUS> by 0.42 percent.

The euro briefly fell to a session low of 1.3595 against the dollar, giving up earlier gains with traders citing a report by Market News International which cast doubt on reports that China may step in to buy Italian debt.

The euro was last 0.3 percent lower at 1.3622.

I'm bearish on the euro with the desperation that's out there manifesting itself with Italy allegedly seeking help from the Chinese, a London-based trader said.

The dollar <.DXY> also fell broadly and was last 0.4 percent down against a basket of major currencies.

The tentative recovery in equities cooled flight into the perceived safety of German bonds. Bund futures retreated off contract highs but growing worries that debt-choked Greece might default sooner than expected kept 10-year yields near record lows.

U.S. crude oil rose 0.5 percent as a weaker dollar rekindled some of the appeal of commodities.

(Reporting by Emelia Sithole-Matarise)