European shares gain on report of progress

EUROPEAN stock markets have chalked up strong gains and the euro has hit $1.30 on fresh hopes that Spain will ask for some sort of aid and improved sentiment regarding Greece, traders say.

A senior Spanish official said late on Monday that Madrid was mulling a request for a line of credit from the EU's new bailout fund, the European Stability Mechanism (ESM), the Wall Street Journal reported.

London's benchmark FTSE 100 index of top companies jumped the next day by 1.12 per cent to close at 5870.54 points.

Frankfurt's DAX 30 gained 1.58 per cent to 7376.27 points, as data showed that investor sentiment in Germany rose for the second month in a row during October.

In Paris, the CAC 40 leapt by 2.36 per cent to 3500.94 points, while Madrid's IBEX 35 index shot up by 3.41 per cent to 7940.20.

"The latest headlines from Madrid imply that a formal request for aid is inevitable," said Ashraf Laidi, chief global strategist at City Index.

"Whether it takes the form of 'applying' for a credit line under the 500 billion euros ($A636.82 billion) European Stability Mechanism (but not necessarily tapping it), or a full-fledged activation of the ESM, Spain is intending to stabilise market sentiment - without triggering the Outright Market Transactions," he added.

OMT's are the European Central Bank's latest heavy weapon against assaults on sovereign debt rates, and Spain is keen to show it can pull through the debt crisis without a full-fledged bailout.

However Raj Badiani at IHS Global Insight warned that "Spain needs to be approach the next few months with caution, and remember that it could take just several disappointing debt auctions alongside the intensifying economic downturn and missed fiscal targets to undermine demand for Spanish sovereign paper and trigger another painful spike in bond yields."

The yield on Spanish 10-year bonds on the secondary market dipped to 5.803 per cent on Tuesday from 5.815 per cent on Monday.

Meanwhile, Greece raised 1.625 billion euros in an auction of three-month treasury bills at a reduced rate of 4.24 per cent, the public debt management agency said.

Shut out of the long-term debt markets since 2010, Greece relies on loans from the European Union and International Monetary Fund to keep the economy afloat, and regularly issues short-term debt.

The debt-laden eurozone country is in talks with auditors representing its EU, IMF and European Central Bank creditors, trying to finalise an austerity package amounting to approximately 13.5 billion euros.

In foreign exchange trading, the euro climbed to $1.3039 from $1.2950 late in New York on Monday. Gold prices advanced to $1746.50 an ounce on the London Bullion Market from $1736 an ounce on Monday.

"On-going optimism that Spain will request EU (bailout) assistance at some point should keep the euro supported against the dollar," said Lloyds Bank analyst Adrian Schmidt.

In New York, the Dow Jones Industrial Average was up 0.87 per cent in midday trading, while the broad-based S&P 500 rose 0.88 per cent and the tech-rich Nasdaq added 0.98 per cent.

Shares in Citigroup gained 0.93 per cent to $37.00 after dropping in early trading on the shock resignations of chief executive Vikram Pandit and chief operating officer John Havens.

Back in Europe, borrowing costs for eurozone member Spain were lower when it raised 4.86 billion euros in a sale of 12- and 18-month debt, a key test of confidence amid warnings the country may need bailing out.

The sale came as Standard & Poor's cut the credit ratings of seven Spanish banks including the two largest, Santander and BBVA, after having downgraded Spain's sovereign debt.

But dealers took the news in their stride owing to bailout speculation, and Santander's stock price soared by 4.32 per cent to 6.06 euros.

Asian stock markets closed higher on Tuesday in response to a strong showing on Wall Street after another round of upbeat data raised hopes for the US economy.

Investors remained hesitant before the release this week of Chinese third-quarter growth figures however, as evidence accumulates of a slowdown in the world's second-biggest economy.

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