By Richard Hubbard
LONDON (Reuters) - World share markets extended a week-long rally on Thursday as manufacturing surveys in China and the United States boosted confidence in global growth and euro zone data at least did not worsen the already weak outlook for that region.
The euro hit a three high against the dollar on optimism that a funding deal for debt-crippled Greece will ultimately be agreed - and despite data indicating the region's economy is on course for its deepest recession since early 2009.
"The driving factors behind euro/dollar are that the global macroeconomic backdrop seems to be improving and people are pricing out the tail risk on Greece," said Arne Lohmann Rasmussen, head of currency research at Danske Bank.
The euro rose 0.4 percent to $1.2880, its highest since November 2.
The view there will be a deal to help Athens was bolstered on Wednesday when German Chancellor Angela Merkel said after the failure of the latest talks, that an agreement was possible when euro zone ministers meet again on Monday.
The hopes for a Greek deal, combined with the better economic data and a growing view that a solution can be found to the U.S. fiscal crisis, lifted the MSCI world equity index 0.4 percent to 326 points, putting it on track for its best week since mid-September.
Europe's FTSE Eurofirst 300 index rose 0.4 percent to a two-week high of 1,101.70 points, with London's FTSE 100, Paris's CAC-40 and Frankfurt's DAX between 0.3 and 0.7 percent higher.
However, trading was subdued, with U.S. markets closed for the Thanksgiving holiday.
Confidence in the global economic outlook got its biggest boost from the HSBC flash Manufacturing Purchasing Managers Index (PMI) for China, which pointed to an expansion in activity after seven consecutive quarters of slowdown.
The Chinese data followed a report on Wednesday showing U.S. manufacturing grew in November at its quickest pace in five months, indicating strong economic growth in the fourth quarter.
"There are questions over whether the Chinese economy is really that bad or if the U.S. will take a long time to recover, but we are getting signs that the situation is not as bad as assumed," said Peter Braendle, head of European equities at Zurich-based Swisscanto Asset Management.
PMI data on the manufacturing and services sectors in Europe's two biggest economies, Germany and France, added to the better tone, revealing that conditions had not worsened in November, though both economies are still contracting.
However, the PMI numbers for the wider euro zone remain extremely weak, pointing to the recession-hit region shrinking by about 0.5 percent in the current quarter - its sharpest contraction since the first quarter of 2009.
"The weak PMI outturn for November is a major disappointment in light of the increases in the German and French PMI surveys, and suggest the recession on the euro zone's periphery is gathering further pace," said ING economist Martin van Vliet.
In the fixed-income markets, the improving tone enabled Spain to sell 3.88 billion euros of new government bonds on Thursday, even though it has already raised enough funds for this year's needs.
The average yield on the three-year bonds in the auction was 3.617 percent, compared with 3.66 percent at a sale earlier in November and a 2012 average of 3.79 percent.
Ten-year Spanish yields were 6 basis points lower on the day at 5.67 percent, having traded above 6 percent at the start of the week.
"It's a clear reflection that sentiment in Spain has improved markedly," RIA Capital Markets bond strategist Nick Stamenkovic said, adding that the market was expecting Madrid to ask for an international bailout early next year.
Expectations Greece will soon get more cash set Greek yields on course for their 10th consecutive daily fall. The February 2023 bond yield dropped to 16.16 percent, its lowest since it was issued during a debt restructuring in March.
Commodity prices had some support from the improving outlook for world demand, but the prospect of only modest global growth in 2013 kept the gains in check.
Three-month copper on the London Metal Exchange rose 0.6 percent to $7,735.25 a tonne, and spot gold inched up to $1,730.30 an ounce.
Oil prices were more mixed as the ceasefire between Israel and Gaza's Hamas rulers on Thursday eased concerns over the impact the unrest might have had on supply from the region, offsetting support from the prospect of more Chinese oil demand.
Brent slipped 7 cents to $110.90 a barrel, while U.S. crude was up 2 cents at $87.40.
(Additional reporting by Jessica Mortimer and Marius Zaharia; Editing by Will Waterman and Alastair Macdonald)