LONDON (Reuters) - World shares and the euro gained on Wednesday as expectations grew that the acute financial problems in Spain and a deteriorating economic outlook would prompt Europe's central bank to respond with more stimulus measures.
While the European Central Bank (ECB) is not widely expected to cut rates when it meets later in the day, there is talk it could indicate a readiness to take some action as early as next month, given the escalating crisis in the euro zone.
Signs that the problems in Europe are hurting the global economy have also increased speculation that other major central banks may embark on a wave of policy easing moves, sparking a broad rally in gold, oil and riskier European government debt.
"The market's expectation regarding further policy action globally is picking up," said Ian Stannard, an executive director at Morgan Stanley.
The euro rose against both the dollar and the yen as investors closed bearish positions against the single currency in response to the rising hopes of central bank action.
The single currency hit a high of $1.2521, up 0.5 percent, before settling at around $1.25, well away from the two-year low of $1.2288 touched last Friday.
Recent disappointing economic data from the United States and China, as well as signs the euro area slowdown is affecting core countries such as Germany, have building up pressure on the world's central banks to make some response.
"We could well see easing taking place throughout of many of the G10 countries," said Morgan Stanley's Stannard.
"We believe that quantitative easing from the Fed is also very much back on the table," he said.
Europe's share markets, back to full strength after two-days of market holidays in Britain that cut volumes, took their cue from a rally in Asia on the stimulus hopes.
The pan-European FTSEurofirst 300 .FTEU3 index, rose 1.6 percent to 968.43 points, led by a gain of 2.9 percent in banking stocks .SX7P, which stand to gain most from any fresh ECB policy measures.
"If they (the ECB) give a hint of a rate cut possibly coming in July then I think we will see markets still move higher," said Neil Marsh, strategist at Newedge.
"If they don't do anything and there is no real suggestion of any further cuts, I think market will probably sell off."
The MSCI World Equity Index .MIWD00000PUS extended the gains it has been making all week, rising 0.75 percent to 295.08 after strong gains across Asia and in other emerging markets.
The MSCI Emerging Equity Index .MSCIEF was up for a second consecutive day, rising over 1 percent, as it recovered from 6-month lows hit on Monday.
U.S. stock index futures also pointed to a higher open on Wall Street. .N
Despite the rally in riskier asset markets, Germany was able to sell 3.98 billion euros of five-year government bonds at record low yield of 0.41 percent as investors remained nervous about Spain's banks and the possibility of Greece leaving the euro.
"(The auction) demonstrates that the demand for safety remains very strong despite increasing risk of a policy intervention by the ECB or EU politicians," said Michael Leister, rate strategist at DZ Bank.
German bond 10-year yields, which hit record lows last week as the nervousness over Spain's finances prompted a surge in demand for less risky assets, were mostly steady 1.26 percent..
Signs that Germany and European Union officials are urgently exploring ways to rescue Spain's debt-stricken banks eased some of the pressure on Spanish government debt ahead of a planned auction of up to 2 billion euros ($2.5 billion) in new bonds on Thursday.
Madrid, the euro zone's fourth biggest economy, said on Tuesday it was effectively losing access to credit markets due to prohibitive borrowing costs and appealed to European partners to help revive its banks.
Spanish 10-year bond yields were 3.3 basis points lower at 6.28 percent, extending this week's fall to around 25 basis points.
Gold rose more than 1 percent to $1,633.18 an ounce, its highest level in a month, on the central bank stimulus hopes.
Other precious metals rose in gold's wake, with both silver and palladium climbing nearly 3 percent to their day's highs.
In the oil markets prices also found support from the larger-than-expected drop in U.S. crude stocks reported by the American Petroleum Institute industry group.
Brent crude, which had seen a near 25 percent drop in the past three months, rose by $1.47 to $100.31 a barrel, while U.S. crude climbed $1.16 cents to $85.45.
Weekly inventory data from the U.S. Energy Information Administration, which typically carries more weight in the market than API estimates, will be released later on Wednesday.
Additional reporting by Francesco Canepa; Editing by Will Waterman and Giles Elgood