The euro rebounded on Thursday after China reaffirmed its long-term strategy of diversifying currency holdings away from the dollar and denied it was reviewing its holdings of euro sovereign bonds.
Spain's minority socialist government won parliamentary backing for its austerity program by a single vote in a drive to cut its budget deficit and restore market confidence dented by the euro zone debt crisis that began in Greece.
The People's Bank of China said in a statement that a Financial Times report that the State Administration of Foreign Exchange (SAFE) was concerned about its exposure to euro zone debt was groundless.
The central bank said Europe would remain one of China's main investment markets and Beijing would support actions to help the European Union resolve its debt crisis.
The 16-nation single currency, which has lost more than 8 percent against the dollar this month, rose more than 1 percent after falling to a day low of $1.2154 on the FT report.
European stocks also rose by 2 percent after a 3 percent jump on Wednesday.
A Chinese government official earlier told Reuters that Beijing's policy of diversifying its $2.4 trillion foreign exchange reserves "will not change," soothing nervous markets.
In Europe, U.S. Treasury Secretary Timothy Geithner took his campaign for swift action to calm markets to Germany, the key player that stunned investors last week with its ban on some speculative trades.
Geithner told Europeans on Wednesday that markets wanted to see the euro zone activate its $1 trillion emergency plan designed to stabilize the currency plagued by fears that a Greek-style debt crisis could widen.
After talks with German Finance Minister Wolfgang Schaeuble on Thursday, he played down differences on financial regulation and said the United States and Europe broadly agreed on the need to put in place more restraints on risk-taking.
Schaeuble acknowledged that Washington and European partners were critical of Berlin's ban on naked short-selling of euro sovereign bonds, credit default swaps and some financial shares.
TOP PAYMASTER
Geithner held dinner talks with European Central Bank President Jean-Claude Trichet in Frankfurt on Wednesday and has also met ECB governing council member Axel Weber, head of Germany's powerful Bundesbank and a fiscal and monetary hawk.
Weber has long warned of long-term pitfalls of extraordinary steps taken to fight the crisis and distanced himself from the ECB's move to buy government bonds and support a $1 trillion emergency euro zone/IMF plan to stabilize markets.
Washington has grown increasingly concerned that the effects of the Greek fiscal blow-out could spread well beyond Europe, with banks prone to a similar confidence crisis that roiled world markets during the 2007-2009 financial crisis.
Germany, Europe's biggest economy and its main paymaster, holds the key to any successful EU-wide action.
Its initial reluctance to bail out Athens was blamed for the EU's slow response once Greece's debt blow-out began morphing into a crisis of confidence in the euro zone as a whole.
But Geithner avoided any public criticism of Berlin's crisis management at a joint news conference with Schaeuble, saying he had enormous respect and confidence in German stewardship in meeting financial challenges.
Berlin blames speculators for aggravating the debt crisis with aggressive bets against the euro, but its short-selling ban was seen as largely symbolic because most of the targeted trades took place outside of Germany's jurisdiction.
Yet despite criticism, Germany looks determined to push through with the clampdown and a finance ministry document showed earlier this week it was even considering widening the ban.
AUSTERITY CLUB
Berlin signed off on a 110 billion euro Greek rescue and the $1 trillion emergency scheme only in return for pledges of drastic spending cuts from potential beneficiaries.
Greece, Portugal, Spain and Italy have all agreed to push through multi-billion euro savings despite fierce opposition from trade unions and sometimes violent street protests.
Spanish Prime Minister Jose Luis Rodriguez Zapatero owed his wafer-thin victory on a two-year 15 billion euro ($18.42 billion) deficit-cutting plan to the abstention of Catalan nationalist lawmakers, underlining his precarious position.
Spanish trade unions were meeting to consider protest action over the planned public sector wage cuts, pension freeze and civil service hiring restrictions.
Elsewhere in the euro zone, French unions were staging a day of action against government proposals, still to be spelled out in detail, to increase the retirement age.
Italian Prime Minister Silvio Berlusconi sought to support the euro with a vigorous defense of his government's 25 billion euro ($30.65 billion) austerity package, approved by his cabinet in an emergency decree.
"The sacrifices required are indispensable to save the euro," Berlusconi said. "For years, Italy — like many countries in Europe — lived above its means. We are all in the same boat."
