* European stocks recover on hopes deal for Cyprus will
* Cypriot leaders reject bailout plan, look for alternative
* Euro up 0.2 pct at $1.2910, off 4-month lows
* Fed meeting outcome also in focus
By Richard Hubbard
LONDON, March 20 (Reuters) - World shares rose and the euro
held firm on Wednesday on hopes that European policymakers would
contain the crisis in Cyprus and attention switched to the
outcome of the U.S. Federal Reserve's policy meeting.
Efforts to rescue Cyprus were thrown into disarray on
Tuesday when its lawmakers rejected the conditions for a 10
billion euro European Union bailout, but markets have remained
calm as investors expect an alternative 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.
Europe's broad FTSEurofirst 300 index was up 0.5
percent, ending three days of losses, while the euro bounced off
four-month lows to be near $1.2950. Brent crude added
close to a $1 a barrel to be above $108 a barrel.
U.S. stock index futures signalled a higher start on Wall
Street as well, where investors were looking ahead to a
statement from the Federal Reserve's policy committee and a news
conference by Chairman Ben Bernanke later in the day.
Markets expect the Fed to maintain its $85 billion monthly
bond-buying stimulus effort despite recent improvements in U.S.
economic data but will be closely monitoring Bernanke's comments
for signals on how long the policy will continue.
Concerns about Cyprus have not gone away completely though
and were clearly evident at a German auction of 3.36 billion
euros in new 10-year bonds, which drew strong demand. The debt
sold at an average yield of 1.36 percent, the lowest auction
price since July last year.
In the secondary market, yields on 10-year German bonds,
typically sought as a safe haven in times of market stress, were
2 basis points higher.
The bond market drew some comfort from comments by the
European Central Bank, which has said it will provide liquidity
to Cypriot banks within certain limits, even though if there was
no bailout the bank would have to end emergency lending
assistance under 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
Tuesday's overwhelmingly rejection of the terms of the European
Union bailout, which involved the levy on savers.
The country was trying to get help from Russia, given the
high level of Russian deposits in Cypriot banks but failed to
agree on any loan deal at a first round of talks.
European share markets looked past the Cyprus with the
pan-pan-European FTSEurofirst 300 index up 0.5 percent
at 1,201.42 points by midday.
The major stock indexes in Germany and France
were 0.8 and 1.1 percent higher respectively, though a
weaker session earlier in Asia left MSCI's world equity index
with gains of just 0.15 percent.
UK BUDGET EYED
The main UK share index saw a more modest 0.1
percent rise as investors awaited details of the British
government's new budget, which could include a change to the
mandate of the Bank of England to allow it to pursue more
Sterling was up 0.2 percent against the dollar ahead of the
budget. It had hit a high of $1.5140 when minutes of the central
bank's last policy meeting revealed policy makers were 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.
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 0.8 percent to $108.40 a barrel
after a near 2 percent drop in the previous session.
U.S. crude for April was up 0.85 percent at $92.95.