Worries about Dubai's debt slipped away from financial markets on Tuesday, sending stocks up sharply higher and weakening lower-yielding assets such as long-term government bonds and the dollar.

Wall Street looked set for a solid start as global equities rebounded from recent weakness.

The catalyst was an announcement late on Monday from Dubai World, centre of the debt storm, that its planned restructuring of some units involved $26 billion in debt, easing some concerns about the size of Dubai's financial problems.

MSCI's all-country world stock index was up 1 percent while its emerging markets counterpart gained more than 1 percent.

"The market is acknowledging that the Dubai crisis is contained to the region itself," said Heino Ruland, strategist at Ruland Research, in Frankfurt.

European shares bounced back from Dubai-triggered falls in the previous session. Th FTSEurofirst 300 was 2 percent higher, having fallen 1.4 percent on Monday.

Banks were among the strongest gainers, having been hit by fears of exposure to possibly defaulting Dubai debt.

The crisis hit last week when Dubai told creditors of Dubai World and property group Nakheel that debt repayments could be delayed.

The fear added to investors' desire to lock in some of 2009's market profits ahead of the new year.

Reuters polls released on Monday showed global investors cutting back on riskier assets even before the Dubai announcement.

YEN FALLS ON BOJ

The return of relative risk appetite drained the dollar of support, sending it down half a percent against a basket of major currencies.

Much attention on the currency markets, however, was focused on Japan where the Bank of Japan fell short of expectations for more aggressive easing measures to support the economy.

It said it would introduce a new operation to provide funds for three months at a fixed interest rate of 0.1 percent, in a bid to enhance monetary easing by trying to bring down longer-term rates.

The dollar was up three-quarters of a percent at 87.53 yen, having hit a 14-year low of 84.81 yen last week. The euro rose 0.9 percent against the Japanese currency.

"The message is that the BOJ isn't completely indifferent to currency rates, and this should at least be marginally yen-negative," said Adam Cole, global head of currency strategy at RBC.

Longer-dated euro zone government bond prices fell as stocks rose and the Dubai worries waned.