By Dhara Ranasinghe and Nigel Stephenson
LONDON (Reuters) - European stocks rose on Wednesday, rallying after losses in Asia, as concerns about the health of banks that have hammered shares globally in recent days eased and oil prices recovered from Tuesday's steep falls.
The more upbeat tone looked set to spill over into U.S. trade, with index futures suggesting a positive open on Wall Street, and took the shine off safer assets such as low-risk government debt and gold.
Investors and traders awaited Congressional testimony from Federal Reserve Chair Janet Yellen for clues to the outlook for monetary policy. Sharp falls in global stocks and weak U.S. economic data have led markets to slash expectations for the pace and extent of Fed interest rate rises to follow December's first hike in nearly a decade.
The pan-European FTSEurofirst 300 index rose 2.2 percent, with investors cheered by a Financial Times report that Deutsche Bank was considering buying back several billion euros of its debt.
Germany's flagship lender, whose shares have fallen almost 40 percent this year, rose more than 13 percent. The STOXX Europe 600 banks index was up 5 percent.
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"The rebound in Deutsche Bank is helping to reassure some investors who had been concerned about possible contagion in the banking sector," said Francois Savary, chief investment officer at Geneva-based Prime Partners.
Italian banks Intesa Sanpaolo and UniCredit were both up more than 11 percent and Germany's Commerzbank added 9 percent.
The FTSEurofirst index has fallen for the last seven trading days and on Tuesday hit its lowest since September 2013. It was on track to post its biggest one day percentage gain in 1 1/2 weeks.
The big banks' fortunes are seen as closely linked with the global growth outlook, which is faltering, while the adoption by several major central banks of negative interest rates to help lift growth has hit their business.
Those concerns have spread across the globe and on Wednesday helped drive Tokyo's Nikkei index to its lowest since 2014. Mitsubishi UFJ Financial Group fell 7.1 percent.
MSCI's broadest index of Asia-Pacific shares outside Japan fell 0.3 percent. Australian stocks touched a 2 1/2-year trough and closed down 1.2 percent.
Oil prices, which fell 8 percent on Tuesday, rose on the prospect of OPEC and rival producers cooperating to tackle a supply glut that has sent prices to a 12-year low.
Brent crude, the international benchmark, rose 1.7 percent to $30.82 a barrel.
Rising stocks dulled the appeal of perceived "safe-haven" assets, among which the yen has shone lately.
NEXT UP: YELLEN
The dollar languished close to a 3-1/2-month low against a basket of currencies, as traders waited for U.S. interest rate guidance from Fed chief Yellen.
The dollar index was flat at 96.143, having touched 95.663 on Tuesday, its weakest since October.
The yen firmed against the dollar but was below a 15-month high hit on Tuesday. It last traded at 114.90 yen per dollar. The euro was down 0.3 percent at $1.1258.
Societe Generale strategist Kit Juckes said Yellen would have a fine line to walk when she delivers her testimony to Congress, due at 1330 GMT.
"How do you sound soothing enough about the global market environment and remain true to what you want -- which is raising rates if the sun comes back out?," he said.
German 10-year government bond yields, another safe haven, edged up 1.6 basis points to 0.25 percent.
Germany sold almost 4 billion euros of two-year bonds in a sale that drew strong demand, helped by bets that the ECB may cut rates by more than 10 basis points in March.
Ten-year Japanese government bonds closed in Tokyo yielding 0.005 percent, having hit a record low of -0.035 percent. The JGB yield went negative on Tuesday, following the Bank of Japan's introduction of negative rates on Jan. 31.
Gold, another asset sought in times of trouble, edged down from a 7-1/2- month high as European shares rallied. It was last at $1,182.61 an ounce.
(Additional reporting by Shinichi Saoshiro in Tokyo, Dhara Ranasinghe, Marius Zaharia, Jemima Kelly and Sudip Kar-Gupta in London; Editing by Catherine Evans)