NEW YORK (Reuters) - Signs of compromise in U.S. talks to stop automatic tax hikes and spending cuts hurting the economy next year pushed world shares to their highest level since September on Tuesday and weakened investor appetite for safe-haven bonds and the dollar.
Wall Street opened slightly higher as investors continued to expect a deal would be reached to avert the "fiscal cliff," though caution remained in the absence of any concrete progress.
Gains were limited following a steep rally in the previous session, which lifted the S&P 500 to its highest in nearly two months, but hopes for a deal grew on signs of compromise between the major political parties in Washington.
"We've been getting a series of snippets suggesting accommodation from both Boehner and Obama, which is feeding the sense in markets that we could get a deal," said Michael Holland, chairman of Holland & Co in New York.
Investors have been reluctant to make big bets in the face of the uncertainty over the budget.
"You can never discount the possibility that the government will do something dumb and screw this up, but right now the market is happy over the prospects for a deal," said Holland, who oversees $4 billion in assets.
The political divide narrowed on Monday night when President Barack Obama proposed leaving lower tax rates in place for those earning under $400,000, moving closer to the $1 million threshold favored by Republican House of Representatives Speaker John Boehner.
The Dow Jones industrial average .DJI was up 52.22 points, or 0.39 percent, at 13,287.61. The Standard & Poor's 500 Index .SPX was up 7.60 points, or 0.53 percent, at 1,437.96. The Nasdaq Composite Index .IXIC was up 21.77 points, or 0.72 percent, at 3,032.37.
European shares rose close to 2012 highs on Tuesday, with the FTSEurofirst 300 index .FTEU3 up 0.48 percent at 1,138.01. The rally pushed the MSCI index of global stocks .MIWD00000PUS up 0.5 percent, its highest level since September, with an 18-month peak also in sight.
The euro hovered near a 7-1/2-month high against the dollar on the signs of progress in the U.S. budget talks and generally improving investor sentiment on euro zone assets, while market players sold the safe-haven dollar.
The euro was last up 0.1 percent on the day at $1.31808, near a 7-1/2 month high of $1.3191 hit on Monday. The dollar index .DXY slipped to a two-month low of 79.606.
Brent crude rose 68 cents to $108.32 a barrel while U.S. crude oil gained 54 cents to $87.74 a barrel. It climbed above the 50-day moving average, a key technical indicator watched by traders, for the first time since early December.
In bond markets, trading remained subdued ahead of the year-end. U.S. and German government bonds futures slipped as increasing signs of progress in the U.S. budget talks eased demand for low-risk assets.
The benchmark 10-year U.S. Treasury note was down 6/32, with the yield at 1.7926 percent.
Sweden cut its interest rates back to 1 percent and Turkey cut rates for the first time in more than a year, while India's central bank reiterated its guidance of further easing in the first quarter of 2013.
Concerns that new fiscal stimulus could seriously increase the country's debt burden pushed the benchmark 10-year Japanese government bond yield to a one-month high of 0.750 percent. <JP/T>
With thin trade accentuating moves, Spanish debt extended gains after a final bill sale of the year raised more than the target amount.
Spanish 10-year bond yields fell 7.5 basis points to 5.38 percent while the equivalent Italian debt fell 8 bps to 4.49 percent, back to where it was before Prime Minister Mario Monti sparked a wave of selling earlier this month by announcing he would resign early.
Reporting by Angela Moon,; additional reporting by Ryan Vlastelica; Editing by Dan Grebler