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* European stocks recover on hopes deal for Cyprus will emerge
* 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 pro-growth strategies.
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.