September 21, 2012 / 3:07 AM / 5 years ago

European shares, euro claw back up after sell-off

Traders are pictured at their desks in front of the DAX board at the Frankfurt stock exchange September 20, 2012.Remote/Lizza May David

LONDON (Reuters) - European shares and the euro clawed back up on Friday and oil rebounded from a 1-1/2 month low as investors brushed aside the latest news of Britain's and Italy's economic and debt problems.

Having ended three of the last four sessions in the red, the FTSEurofirst 300 .FTEU3 was up 0.3 percent at mid-morning, a rise matched by the MSCI global index .MIWD00000PUS.

Helped on by the expiry of options contracts, London's FTSE 100 .FTSE, Paris's CAC-40 .FCHI and Frankfurt's DAX .GDAXI were up between 0.4 and 0.7 percent higher after Australian, Japanese and Hong Kong markets all rose. .L .EU .N

"One of the real plus points we have had this week is that there have been no European politicians saying anything stupid, so if that can continue over the coming weeks it will help stabilize markets," said Alastair McCaig at financial spread betting firm IG index.

Markets brushed off a well-flagged report from the UK showing its plans to bring down its deficit have fallen behind target as the European debt crisis has hit global growth.

It followed Italy's warning late on Wednesday that its recession will be far more severe than forecast, making it harder to reduce the country's debt burden.

The euro, which has lost around 1.5 percent since hitting a 4-1/2 month high a week ago, regained early momentum after the lower-than-expected UK borrowing figures to climb back above the psychological $1.30 mark at 0900 GMT.

BONDS, OIL

In bond markets, the appetite for risk continued its cautious recovery despite Italy's government warning the country's recession would be worse than feared.

Demand dipped for German government bonds which are favored by risk averse investors. December Bund futures were 30 ticks lower at 139.89 while Spain and Italy's 10-year bond yields dropped slightly.

Helping the upbeat mood were signs that Spain is slowly moving towards requesting financial assistance. The government is considering freezing pensions and speeding up a planned rise in the retirement age to meet conditions for aid, sources with knowledge of the matter told Reuters.

The ECB's new plan, which requires struggling countries to submit to fiscal rehabilitation programs in order to qualify for bond-buying support in the open market, has been one of the key factors in the sharp drop in Italian and Spanish borrowing costs and the 15-20 percent surge in major stock markets.

Finnish ECB policymaker Erkki Liikanen reiterated the ECB's intention to stabilize the bloc's strained bond markets, saying inflamed borrowing costs based on speculation the euro could break apart were "unacceptable".

Oil prices, which have risen by almost a third since June but have eased this week, edged back up to $111 a barrel on Friday as Libya's precarious security situation and lower North Sea production stoked supply fears.

"We saw oil prices spike up around 30-32 percent last year when Libya was out of the market," said Natalie Rampono, a commodity strategist at ANZ. "This is something to focus on, especially if the security situation deteriorates."

Gold prices hovered at a 6-1/2 month high, crawling up 0.2 percent to $1,770.76 an ounce supported by the ongoing lift from the recent aggressive moves from the Fed, ECB and the bank of Japan.

Additional reporting by Tricia Wright and Luke Pachymuthu; Editing by Alastair Macdonald/Ruth Pitchford

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