By Richard Hubbard
LONDON (Reuters) - European shares rose and the euro hovered near a one-month high on Tuesday as investors took comfort at the prospect the region was edging toward a new plan to resolve its debt crisis and calm the headwinds buffeting the global economic recovery.
Markets have enjoyed a strong run in recent days after the European Central Bank promised to step in and buy bonds to ease pressure on Spain and Italy, albeit under strict conditions that have yet to be spelled out.
"People are starting to reprice the Italian and Spanish risk ... It's not over, and I don't expect the process to stop until we have an accident," said Francois Duhen, strategist at CM-CIC Securities.
The FTSEurofirst 300 index of top European companies was up 0.4 percent at 1090.55 points, while the Euro STOXX 50, the index of blue chip euro zone stocks, was up 1.1 percent.
Cautious hopes that Europe's three-year old crisis was inching towards a resolution lifted the MSCI world equity index 0.2 percent to near one-month highs around 301.96 points.
EQUITY YIELDS SHINE
Share markets have enjoyed renewed demand from investors over the past three months as high-rated government bond returns have fallen sharply due to demand from investors seeking safety from the troubles in Europe, increasing the relative attractiveness of the returns on offer from blue-chip stocks.
"Both growth and income investors are now hunting down the 4 percent dividend yields you can get on many global blue chips," said Tom Elliott, global strategist at JP Morgan Asset Management.
But on Tuesday European banking stocks, which have rallied more than 12 percent over the last nine days, were among the top fallers, as more scandal hit the sector.
Standard Chartered led the declines, falling as much as 20 percent after New York's top bank regulator threatened to remove its state banking licence, saying the British lender hid $250 billion in transactions tied to Iran.
However, the euro zone's main banking index, home to lenders such as UniCredit, Deutsche Bank and Societe Generale, has jumped 23 percent in the past two weeks, supported by ECB president Mario Draghi's pledge that the central bank was "ready to do whatever it takes to preserve the euro".
Those comments have also helped push up the euro against the dollar. It was trading 0.2 percent higher at $1.2425, having hit a one-month high of $1.2444 on Monday, its highest since early July.
"We are expecting the euro to rise to $1.26 in a month's time and $1.30 in three months, partly due to renewed optimism about the euro zone and partly because of the dollar's weakness," said Michael Sneyd, FX strategist at BNP Paribas.
The optimism was also easing pressure in the Spanish and Italian debt market. Spain's 10-year bond yields were 4.5 basis points lower at 6.75 percent, with the Italian equivalent 6 basis points lower at 5.94 percent.
But investors remain cautious about the next steps, as ECB action can only be triggered when a country decides its finances are in such bad shape it needs a bailout, which could unleash a wave of fresh fears about the whole region.
"The lack of a large-scale policy response continues to push a formal bailout request by Spain as more probable than possible," said Bill O'Neill, Chief Investment Officer for Europe, Middle East and Africa, Merrill Lynch Wealth Management.
(Additional reporting by Marc Jones and David Brett; Editing by Will Waterman)