European shares pared losses on Thursday following news that French president Nicolas Sarkozy is to meet Germany's Angela Merkel next week to discuss the euro zone governance and other international issues.
Investors purchased beaten-down global stocks encouraged by a surprise dip in the number of Americans claiming new jobless benefits and news that French president Nicolas Sarkozy is to meet Germany's Angela Merkel next week to discuss the euro zone governance and other international issues.
US and European stocks reversed course after steep losses in the previous session.
US stocks rose 4 per cent and investors cheered results from Cisco and US jobless claims data.
Financials bounced back sharply after leading losses yesterday, with the S&P financial sector up 7 per cent.
Labor Department data showed new claims for unemployment benefits dropped to a four-month low last week, a dose of good news for an economy battered by a credit-rating downgrade and a spate of soft data in recent weeks.
US initial claims for state unemployment benefits fell 7,000 to a seasonally adjusted 395,000 last week, the lowest level since early April and below economists' forecasts of 400,000.
The market gains came a day after the major US stock indexes slid more than 4 per cent on fears about the French banking system's health and followed Monday's 6 per cent drop on the S&P 500.
Analysts said bearish sentiment persists following last week's downgrade of the United States' credit rating by Standard & Poor's and debt problems in the euro zone.
However, a new crisis of confidence gripped Europe's banking industry today as borrowing costs soared, lenders sought emergency funding, and some institutions reviewed exposure to French banks in particular.
Shares in Societe Generale , whose shares dropped 15 per cent yesterday, yo-yoed for most of the day in heavy trading, carrying other big French names in their wake this time.
Attempts to reassure the market by the bank's boss and the governor of the Bank of France had little effect for much of the day.
French banks have an unusually high exposure to some of the European countries whose debt levels are starting to look unmanageable.
They have big holdings of Italian government bonds and subsidiaries in Greece. Fears about France's own sovereign health and a reliance on strained short-term funding markets have made them a target in recent days.
Emergency overnight borrowing from the European Central Bank surged, with banks taking over €4 billion of overnight funds from the ECB, the highest since mid-May.
Share prices had nevertheless recovered by close of trading, and a regulatory source dismissed rumours of a ban on short-selling to prop up bank stocks. Such a move "doesn't look likely", the source said.
There was nervousness too the short-term funding markets, where there were tangible signs of concern.
Markets were on edge after bankng sources told Reuters that one bank in Asia had cut credit lines to major French lenders while others in the region were reviewing trades and counterparty risks due to concerns about the exposure of French banks to peripheral euro zone bonds.
Analysts cautioned that one week was not enough to show definitive improvement in the struggling US labour market, but the better-than-expected data was a welcome surprise.
The anaemic pace of US growth in the first half of the year has fuelled worries of another recession, and analysts are eager to see signs the recovery could pick up steam in the rest of 2011.
The dollar and euro soared more than 5 per cent versus the Swiss franc after the Swiss National Bank said it could ease monetary policy further.
The MSCI world equity index gained 1.3 per cent, changing course after early losses, and the pan-European FTSEurofirst 300 provisionally closed up 2.6 per cent.
In Dublin the Iseq closed up 1.6 per cent at 2,449 with AIB and Kenmare among the main winners with rises of 35 per cent and 15 per cent respectively.
The European banks index was 3.9 per cent higher, with BNP Paribas about flat, and Credit Agricole finishing up 5.1 per cent.
Earlier in the afternoon the cost of insuring SocGen debt against default had risen, with five-year credit default swaps 31 basis points wider at 365 basis points, Markit said.
Additional reporting: Reuters/ Bloomberg