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LONDON (Reuters) - Evidence that Europe's economy is finally picking up steam lifted the region's shares to a 2-1/2 month high on Tuesday as expectations for strong U.S. data put the dollar on course for its first three-day rally since June.
Many economists expect U.S. retail figures due at 0830 ET to come in strong and add to the case for a sooner-rather-than-later cut in Federal Reserve stimulus, a debate that has dominated financial markets for months.
Wall Street, which has fallen in five of the last six sessions, was expected to open 0.2-0.4 percent higher after a positive day for both European and Asian stock markets.
In Europe, a jump in Germany's ZEW economic sentiment survey dovetailed with a rise in euro zone industrial output and the fastest rise in UK house prices in seven years, bolstering a renewed sense of optimism in the region.
London's FTSE .FTSE, Germany's DAX .GDAXI and Paris's CAC 40 .FCHI climbed 0.5 percent, 0.8 percent and 0.3 percent respectively to push the broad FTSEurofirst 300 .FTEU3 index to its highest level since mid-May before gains were trimmed.
Debt markets also reflected that shift. Yields of safe-haven German 10-year government bonds hit their highest in over a month and a half while risk premiums on Italian and Spanish bonds continued to ease.
"It is not only Germany that is moving in the right direction," said Deutsche Bank economist Mark Wall.
"There is a general improvement taking place in Europe and in the context of this being a debt crisis one shouldn't underestimate the importance of getting back to a position of growth... The 64,000 dollar question is whether this is sustainable."
The Mannheim-based ZEW economic think tank's monthly poll of economic sentiment rose to 42.0 from 36.3 in July, reaching its highest level since March and beating the consensus forecast of 40.0 in a Reuters poll.
The survey's organisers put the rise down to calmer conditions in the euro zone's trouble spots, rising German demand and a belief the European Central Bank will keep interest rates at record low levels for the foreseeable future.
GDP data due on Wednesday is expected to show the region's economy grew 0.2 percent in the second quarter, according to a Reuters poll, marking the end of its longest recession on record.
The euro and sterling had also made gains after their related data but the dollar reeled them back in by 0745 ET as focus turned to U.S. retail sales.
That data will be the latest temperature reading of the U.S. economy as investors try to gauge when the Fed will begin winding down its stimulus.
In Asia, Japanese shares .N225 had jumped 2.6 percent and the yen fell after a media report that Prime Minister Shinzo Abe is considering a cut in corporate tax to counter the pain of a planned sales tax increase.
For the Nikkei it was a partial rebound after the index fell to its lowest since end-June on Monday on slower-than-expected economic growth, while the yen's 0.6 percent dip to 97.475 yen to the dollar took it away from last week's seven-week high.
Against a basket of major currencies, the dollar .DXY was up 0.2 percent, extending gains into a third day for the first time since mid-June, just before the Fed calmed fears about the phase-out of its $85 billion of monthly bond purchases.
"Better economic data from China last week has left Asia ex-Japan with a positive tone. Now it will be the turn of the U.S. to show what it can do with some retail therapy," Societe Generale wrote in a note.
In the commodities markets, gold eased 0.1 percent after surging as much as 2.2 percent to a three-week high on Monday. The precious metal is down 20 percent this year following a sharp sell-off as investors have eyed a downward shift in central bank stimulus.
A move by India to raise import taxes on gold and silver, designed to defend its battered rupee currency, added to the pressure.
Also linked to the recent rebound in gold, South Africa's stock market, which includes a number of producers, hit a record high for the second day running.
There were signs of strength elsewhere too. Copper hit a two-month high of $7,340 a tonne and tensions in Libya pushed Brent oil to $109.70 a barrel to leave it just shy of last week's $110.09 four-month high.
"Since the Fed has cooled talk of ...(winding down stimulus) this has in general supported commodities, and the economic data has been a bit better," said Rabobank commodities strategist Georgette Boele.
Reporting by Marc Jones; Editing by Stephen Nisbet, John Stonestreet