By Richard Hubbard
LONDON (Reuters) - European shares rose after three days of losses on Wednesday and the euro held firm on growing expectations that European policymakers would ensure the crisis in Cyprus did not spread to other countries.
Europe's broad FTSEurofirst 300 index was up 0.4 percent, the euro bounced off four-month lows to just over $1.29, and Brent crude prices edged back to near $108 a barrel.
Analysts said initial shock from the radical plan in the Cyprus bailout to raise a levy on savers to help fund the deal was giving way to a belief that another solution would emerge.
"If the last year has taught us anything it is to understand the willingness of European policymakers to do everything they can to protect the euro," said Nick Beecroft, senior market analyst at Saxo Capital Markets.
"I think (the Cyprus crisis) will pass over; it is a unique and small matter," he added.
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The European Central Bank (ECB) has already said it would provide liquidity to Cypriot banks within certain limits, although if there was no bailout it would have to end emergency lending assistance if it stuck firmly to its current rules.
"We can provide emergency liquidity only to solvent banks, and the solvency of Cypriot banks cannot be assumed if an aid programme is not agreed on soon, which would allow for a quick recapitalisation of the banking sector," the ECB's chief crisis negotiator Joerg Asmussen said in a newspaper interview.
Meanwhile, Cypriot leaders were holding crisis talks in Nicosia on Wednesday to try to avert a financial meltdown after the island's parliament overwhelmingly rejected the terms of the European Union bailout, which involved the levy on savers.
Its Finance Minister Michael Sarris was in Moscow seeking an agreement with Russia for a last-minute loan deal, given the high level of Russian deposits in Cypriot banks.
The calmer tone to the markets saw the euro gain 0.2 percent to around $1.2910 and above a four-month low of $1.2843 hit on Tuesday when worries the Cyprus crisis could reverberate across the region hit their peak.
The major stock indexes in Germany, the UK and France were between 0.1 and 0.5 percent higher, though a weaker session in Asia left MSCI's world equity index with gains of just 0.1 percent.
Markets are also waiting for the outcome of the U.S. Federal Reserve's latest policy meeting for any signs of a change in attitude to its aggressive bond buying programme, which has supported all risk assets.
BUDGET SHIFT
UK markets were switching focus to the government's budget for the coming year, due at 1230 GMT, which could include a change to the mandate of the Bank of England to allow it to pursue more pro-growth strategies.
Sterling was up 0.2 percent against the dollar. It hit a high of $1.5140 when minutes of the central bank's last policy meeting revealed policy makers split on the need for more asset purchases to boost the economy.
"If the Chancellor announces in the Budget later today a change to the Bank's remit allowing it to pursue a more aggressive monetary policy, then it may not be long before a majority are voting for more stimulus," said Samuel Tombs, UK Economist at Capital Economics.
Bond markets were closely watching a German sale of up to 4 billion euros of 10-year bonds later to see whether the chaos in Cyprus was causing a major shift in sentiment.
Investors have already begun to back away from bonds issued by other struggling countries on the euro zone periphery, and upward pressure on Spanish and Italian bond yields was expected to continue throughout the session.
Oil prices joined in the general recovery, rising above $108 a barrel and away from a three-month low hit on Tuesday.
"Clearly, market players anticipate that an alternative solution will be found for Cyprus," said Carsten Fritsch, analyst at Commerzbank. "Nonetheless, the uncertainty surrounding this issue is likely to continue to keep oil prices in check in the short run."
Brent crude for May rose 58 cents to $108.03 a barrel after a near 2 percent drop in the previous session. U.S. crude for April was up 52 cents at $92.68.
(Additional reporting by Marc Jones and Alex Lawler; Editing by Will Waterman)