LONDON (Reuters) - Confidence that European leaders will come up with a credible plan to lead the region out of its debt crisis at a crucial summit this week lifted world stocks and boosted the price of troubled euro zone bonds on Monday.
The positive mood in Europe looks set to add to the glow from last week's U.S. jobs data with stock index futures pointing to a higher open for equities on Wall Street.
"The U.S. economy has been resilient to market turmoil of recent months but remains vulnerable to a deterioration in Europe," Julia Coronado, BNP Paribas North America chief economist, said in a note.
Market sentiment was given an early boost after Italy unveiled a 30-billion-euro package of austerity steps, and the Irish government too said it would do the something similar in a new budget to be announced later in the day.
The positive mood drove Italian bond yields further below the worrying 7 percent level at which they are seen as unsustainable and the cost of insuring Italian debt against default also fell.
The poor state of the euro zone's economy, however, was underlined by business surveys suggesting there will be a steep economic contraction in the current quarter.
Despite this, retail sales data for October were better than expected.
European stocks were slightly higher with the FTSEurofirst 300 .FTEU3 gaining just under 1 percent, building on last week's biggest weekly gain since late 2008.
Shares in financial institutions led the gains with the main euro zone banking index now up 23 percent from its lows in late November.
The week ahead features a series of high profile meeting among European leaders seen as crucial to the future of the 17-nation euro zone.
French President Nicolas Sarkozy and German Chancellor Angela Merkel met in Paris ahead of a key European Union summit later in the week to iron out their differences on how to centralize control of euro zone budgets to resolve the region's debt crisis.
The two leaders are expected to outline joint proposals for more coercive budget discipline in the euro zone, which they want all 27 EU leaders to approve at Friday's summit.
An agreement could pave the way for an accelerated implementation of the euro zone's rescue scheme to help ensure debt-ridden countries have a vehicle to tap for funds while encouraging bondholders to buy euro zone bonds.
On Tuesday, U.S. Treasury Secretary Timothy Geithner kicks off a visit to the region in Germany, where he will meet European Central Bank President Mario Draghi and government officials.
In a further sign Europe is making progress, four sources told Reuters Germany is prepared to soften language in the euro zone's permanent bailout mechanism compelling bondholders to accept losses in exchange for much stricter budget rules.
World stocks as measured by MSCI .MIWD00000PUS were up about 1.2 percent. Earlier Japan's Nikkei .N225 closed up 0.6 percent.
The euro, which gained 0.8 percent last week, was up slightly at $1.344. The currency stood about 1.4 percent above its seven-week low of $1.3213 hit late last month.
"The market wants to see some kind of concrete agreement before investors are prepared to liquidate short positions," said Niels Christensen, currency strategist at Nordea in Copenhagen.
"I see the euro trading sideways for now. We may need to see negative news that there won't be any fresh agreement for it to test last week's lows."
On fixed income markets, Italian government bond yields fell across the curve on Monday, and the price of insuring against a default was also lower after the country's austerity measures.
Short-dated Italian bond yields were down more than 80 basis points and 10-year yields were 49 basis points lower at 6.25 percent, well below the 7 percent level that triggered such concern in November.
Additional reporting by Jessica Mortimer and Hideyuki Sano. Editing by Jeremy Gaunt.