Asian shares rebounded and the euro clung to gains on Tuesday on hopes that euro zone officials will act to corral Greece's debt woes and prevent another full-blown banking crisis.
Financial stocks and global miners were among those to rebound strongly, although some market players cautioned against undue optimism.
"It's a knee-jerk reaction to the world failing to come to an end last night," said Richard Morrow, director at Melbourne-based private client stockbroker E.L. & C. Baillieu. "It is a reversal and I don't see it lasting. The market has been as gloomy as I can remember since the last days of 2008."
After three sessions of steepening falls and wild swings on commodities markets, oil, copper, gold and silver all rose. U.S. crude jumped nearly $2 a barrel.
Turbulence on global markets since late July has been driven by investors' twin fears of renewed recession in the United States, and the chaos that Europe's sovereign debt crisis could inflict on the financial system if it continues unchecked.
European Central Bank policymakers said on Monday that officials were working to increase the firepower of the region's rescue fund in their latest effort to staunch a crisis that U.S. President Barack Obama said was "scaring the world".
U.S. markets reacted positively, finishing more than 2% higher on Monday , and the mood continued in Asia, where Tokyo's Nikkei rose 1.8%, coming off its lowest close in more than two years. S&P 500 index futures rose 0.2%.
MSCI's broadest index of Asia Pacific shares outside Japan rose 3.9%, after plumbing its lowest level in 16 months on Monday. The index is down more than 26% from its 2011 high in April.
UBS analysts said fund flow data showed foreign money managers had pulled money out of Asia ex-Japan markets last week and predicted more selling by funds looking to send money back to Britain, the United States and Europe.
RATE REVERSAL
Expectations have been rising among market economists that Greece will be forced soon to default on its massive debts, with uncertain consequences for both the exposed European banking sector and other struggling euro zone nations.
There is also concern that, whilst Europe's rescue vehicle has been able to cope with bailing out Greece, Portugal and Ireland, its resources would be overwhelmed if a bigger nation such as Italy or Spain were to need help.
Senior ECB officials confirmed the 440 bln euro rescue fund would likely be increased in size, and there were also hints from policymakers that the central bank could cut interest rates next month, reversing a hike earlier this year in a move already expected by markets.
"Markets are getting more confident around some action plan in Europe, which is positive, but on the other side, markets are also looking for more policy easing from the ECB, which is negative," said Greg Gibbs, currency strategist at RBS in Sydney.
"The combination of both will leave the euro caught in the middle somewhere."
The single currency traded around $1.3560, up about 0.2% on the day, after rallying from an eight-month low of $1.3360 on Monday. The dollar eased 0.6% against a basket of currencies .
Gains for equities and other riskier assets knocked Japanese government bonds lower, with the benchmark 10-year yield rising 1.5 basis points to 0.99%.
The improved sentiment also helped credit markets, with spreads tightening on the iTraxx benchmark index of investment grade Asia ex-Japan corporate bonds.
Commodities were helped by a weaker dollar, which makes assets priced in the U.S. currency cheaper for holders of other currencies.
Brent crude oil rose 1.4% to $105.35 a barrel and U.S. crude gained 2.3% to $82.09.
Copper , which ended Monday up 2 percent after falling more than 6 percent at one stage, rose 1.1% on Tuesday to $7,342 a tonne.
Gold, which has been hammered in recent days by selling by hedge funds to cover losses elsewhere in portfolios, rose 1% to around $1,640 an ounce.
