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European stocks, euro stage mild rebound

Europe's main stock markets rebounded gently on Tuesday as investors fished for bargains after shares prices slumped sharply the previous day on political uncertainty in Italy and Spain, dealers said.

Gains were tempered by news that the US government plans to sue Standard & Poor's over its rating of mortgage bonds at the heart of the 2008 financial crisis. The agency has slammed the case as "entirely" groundless.

The European single currency rose to $1.3519 from $1.3514 late on Monday. Gold prices advanced to $1,677.30 an ounce on the London Bullion Market from $1,666.

In European stock trading, London's FTSE 100 index of top companies was showing a mid-day gain of 0.56 percent to 6,281.70 points. Frankfurt's DAX added 0.18 percent to 7,651.71 points and in Paris the CAC gained 1.07 percent to 3,698.87.

Madrid's IBEX 35 rallied 1.76 percent to trade at 8,057.90 points, while Milan's FTSEMIB soared 1.30 percent to 16,749.40.

"European stock markets are staging a mild recovery in Tuesday's session following the beat-down in the previous session which fed through to US and Asian share markets overnight," said Ishaq Siddiqi, an analyst at ETX Capital.

"Traders are picking up some recently battered sectors, particularly banks, however the big question is how long this morning's move to the upside can last."

Asian markets had tumbled on Tuesday, bringing a recent rally to a juddering halt, as Wall Street was also pounded by political concerns in Spain and Italy.

The euro had surged Friday to a 14-month peak at $1.3711 but it slumped on Monday after Spain's prime minister Mariano Rajoy was forced to deny corruption claims, while Italy's ex-premier Silvio Berlusconi spooked markets ahead of this month's election.

Rajoy's ruling Popular Party said on Monday it would take legal action against anyone who published or leaked information implicating its executives in a case of alleged corruption that has sparked calls for the prime minister to resign.

Berlusconi meanwhile vowed to throw a spanner in the works of a government austerity drive as his party showed solid gains in polls ahead of a general election.

The news also sent European equities tumbling on Monday, with banking shares suffering some of the heaviest losses.

"Political instability in both Spain and Italy are still rattling sentiment on the whole with traders now fearing an impending bailout for Spain is the current government is removed on corruption charges," said Siddiqi.

"Over in Italy, the prospects of anti-German/anti-euro zone Berlusconi making meaningful headway in the upcoming general elections in that country, adds to the political uncertainty in the region."

This week's newsflow has brought eurozone fears sharply back into focus ahead of a looming Brussels summit on Thursday and Friday, when leaders will seek to rescue talks on the European Union's trillion-euro budget.

"In January there were whispers that the eurozone crisis was over. In our view the crisis will still be having an impact for many years to come, though we anticipate the tremors will over time decrease in size," cautioned Rabobank currency analyst Jane Foley.

"We would warn that both the political, budgetary and economic difficulties are sufficiently worrisome in Spain and Italy to cause a significant stumbling block for the euro in the coming months," she added.

-- Political uncertainty --


Many market analysts have long expressed concerns that the eurozone debt crisis could spread to cash-strapped Italy and Spain, following vast bailout packages for Greece, Ireland and Portugal.

"Political uncertainties in Spain and Italy cast doubts over the ability of those governments to stick with austerity measures and structural reform," said Neil MacKinnon, analyst at VTB Capital financial group.

"At some stage, Spain and Italy might well require support from the European Central Bank (ECB) and activation of its bond buying program."

Investor sentiment was cautious ahead of interest rate decisions in both Britain and the eurozone later this week.

Later this week, on Thursday, the ECB and the Bank of England will reveal the outcome of their latest monetary policy meetings.

In earlier Asian deals on Tuesday, Hong Kong shares tumbled 2.27 percent, Tokyo dived 1.90 percent, Seoul slipped 0.77 percent and Sydney shed 0.51 percent.

Shanghai reversed morning losses and ended up 0.20 percent after the Chinese central bank injected a huge amount of cash into the market to satisfy pre-Lunar New Year holiday demand from traders.