European shares joined a global rally in stocks on Tuesday as expectations rose that major central banks will take more action to support the world economy, after factory data highlighted the drag on growth from the euro zone debt crisis.
However, the euro held steady near $1.26 to the dollar, under pressure from reports that Finland and the Netherlands opposed a key element of a deal agreed by European leaders on Friday to allow a new bailout fund to buy government bonds in the market.
Equity markets were mostly focused on the July 5 meeting of the European Central Bank, when it is widely expected to cut its main interest rate by 25 basis points to 0.75 percent.
"If the ECB offers loud support this Thursday with a rate cut and a signal of more to follow in the face of lower growth and inflation, there may be enough fuel for a summer rally in stock markets," said Bill O'Neill, EMEA Chief Investment Officer for Merrill Lynch Wealth Management.
The FTSE Eurofirst 300 index of top European companies gained 0.3 percent to 1038.43 points, adding to a 4.2 percent jump seen since Friday.
The euro zone's blue chip Euro STOXX 50 index has jumped 6.2 percent in the two last sessions after euro zone leaders surprised investors with the extent of the progress made at their recent summit in tackling the protracted debt crisis.
After gains on Wall Street on Monday and earlier across Asia, MSCI's world equity index was up 0.3 percent at 314.3.22 for a gain of 3.7 percent since Friday.
The key reason for the gains in equities is not so much hopes of a resolution of Europe's problems, but that the crisis can be clearly seen to be depressing economic activity worldwide, raising the likelihood of central bank action.
This view gained momentum on Monday when data for June showed the giant U.S. manufacturing sector was on course for its first contraction in nearly three years.
A similar measure of factory activity in the euro area also held steady at its lowest level since June 2009, while joblessness across the region rose to a record high in May.
Many market players believe a weak U.S. jobs report on Friday could push the U.S. Federal Reserve into a third bout of quantitative easing (QE the policy of creating money to fund asset purchases that has lifted riskier assets such as shares and commodities in the past.
"We could see central banks on both sides of the Atlantic cutting (rates), which obviously markets would take positively," said Jessica Ground, UK fund manager for Schroders.
China serves up gains
A surprise rise in activity in China's services sector for June also buoyed commodity prices and resource-related assets.
China's service industry, which accounts for 43 percent of output in the world's second largest economy, expanded at its fastest pace in three months last month, according to an official purchasing manager's survey.
The potential for a rebound in demand for base metals from china, along with hopes its central bank could announce moves to boost liquidity in the banking sector sent copper to six-week highs of $7,790 a tonne.
Crude oil was also rising, but this was being linked to news that Iranian lawmakers had drafted a bill calling for Iran to shut the key Straits of Hormuz to oil tanker traffic at a time when a strike by oil workers in Norway has curbed oil output.
Brent crude was up 25 cents a barrel at $97.59 after earlier hitting a high of $98.35.
Gold gained half a percent to $1,605.36 an ounce on hopes the central banks would ease monetary policy.
The precious metal thrives on abundant money supply and low interest rates, which increases the inflation outlook and benefits bullion, which is seen as a hedge against rising prices.
