Lower US oil prices helped cool speculation today that the Federal Reserve will call a halt to its interest rate rises later this month, lifting the dollar off recent lows and taking the gloss off government bonds.
Data showing a surprise surge in German manufacturing also dented demand for euro zone bonds, prompting some profit-taking after a month long rally had pushed yields to record lows.
Merger and acquisition activity and mostly positive corporate results boosted European stocks to within striking distance of last month's three-year highs.
A strong start beckoned on Wall Street as investors returned from the extended Labor Day weekend.
US light crude fell almost $1 to about $67 a barrel after industrialised countries began to release oil from emergency stocks to help meet a shortfall created by Hurricane Katrina's destructive run through US Gulf states.
Fears that the deadly storm will have a lasting impact on the US economy had prompted some economists to scale back their growth estimates for the rest of the year and increased the odds the Fed might opt to keep rates at 3.5 per cent when it meets on September 20.
The OECD advised the Fed to ease the pace at which it raises rates due to threat to growth from the surging oil price, which hit a peak above $70 a barrel last week and is up more than 50 per cent since the start of the year.
But others said the Fed was likely to keep raising rates.
Government bonds eased from recent peaks, with the yield on 10-year Treasuries rising to 4.07 per cent, while comparable euro zone bonds yielded 3.08 per cent.