Stocks rose as investors took heart from signals that the European Union may soon put in place euro zone bonds.
Britain's FTSE 100 gained 1.1 per cent, France's CAC 40 rose 1.5 per cent, and Germany's DAX popped 2.2 per cent higher after European Commission President Jose Manuel Barroso said the commission will present options for the introduction of the bonds to alleviate the euro zone debt crisis.
U.S. stock futures indicated a positive opening on Wall Street as well. Dow futures rose 47 points, or 0.4 per cent, to 11,068, while S&P 500 futures gained 6.4 points, or 0.6 per cent, to 1,171.60.
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Moody's Investors Service downgraded two of France's top banks, Societe Generale and Credit Agricole, and left France's largest bank BNP Paribas on review, saying its profitability and capital base provided an adequate cushion to support its Greek, Portuguese and Irish exposure.
Shares of French banks have taken a hammering in recent months due to concerns that they are among the biggest creditors of the deeply indebted European economies. BNP Paribas plans to sell 70-billion euros ($96-billion U.S.) of risk-weighted assets to ease fears about French bank leverage and funding.
French President Nicolas Sarkozy and German Chancellor Angela Merkel are due to talk with Greek Prime Minister George Papandreou on Wednesday.
German government bonds pared gains while the cost of insuring Italian and Spanish debt against default also fell.
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Greek two-year government bond yields surged 3.3 percentage points to approach 95 per cent.
Gold rose $6.50 to $1,836.60 an ounce.
U.S. crude oil slipped 54 cents to $89.67 a barrel.
The Canadian dollar traded lower at $1.0105 (U.S.).