World stocks bounce on low prices

Traders work at their desks in front of the the DAX board at the Frankfurt stock exchange July 5, 2010.

NEW YORK (Reuters) - World stocks posted their biggest one-day gain in nearly a month on Tuesday after recent drubbings pushed shares to attractive levels, while the euro rose as investors waded back into risky assets.

Gains were tempered late in the U.S. trading day, however, as a slowdown in growth in the U.S. service sector weighed on sentiment. Worries about the possibility of a double-dip recession, which has been dogging financial markets, persisted.

Despite mixed reports, MSCI's all-country world stock index .MIWD00000PUS jumped 1.6 percent, after last week plumbing its lowest point since May 25.

The euro rose against the dollar as risk appetite increased after Australia's central bank gave an upbeat assessment for Asia and for the Australian economy.

But crude oil prices fell, unable to hold earlier advances, after equities pared gains. And gold hit six-week lows after the precious metal fell below key support of $1,200 an ounce.

"A lot of people got excited about how cheap things have gotten," said Stephen Massocca, managing director of Wedbush Morgan in San Francisco.

"Absolutely nobody believes in the rally, at least the ones we'll be seeing for now. The market sentiment is bearish and there is no doubt that the economic recovery is slowing down."

The Institute for Supply Management, a U.S. business group, said its index of non-manufacturing activity grew in June for a sixth straight month, though the pace of expansion was its slowest since February. Some analysts on Tuesday said the data on the U.S. service sector, which dominates the U.S. economy, did not suggest a double-dip recession was on the horizon.

"The change in direction is serious," said Joseph Trevisani, chief market analyst at FX Solutions in Saddle River, New Jersey. "Statistics do not yet indicate a recession but the mood is worrying."

In New York, the Dow Jones industrial average .DJI rose 57.14 points, or 0.59 percent, to 9,743.62. The Standard & Poor's 500 Index .SPX gained 5.48 points, or 0.54 percent, to 1,028.06 and the Nasdaq Composite Index .IXIC edged higher by 2.09 points, or 0.10 percent, to 2,093.88.

The S&P fell every day last week and is down 8.3 percent since December. Signs of weakness in the labor and housing markets as well as a potential slowdown in manufacturing have sparked worries.

U.S. stocks on Tuesday were supported in anticipation of a $22 billion initial public offering by the Agricultural Bank of China. The IPO, which could set a world record, is seen as a key test of investor sentiment.

Comments from a member of the European Central Bank Governing Council, Christian Noyer, relieved concerns about the health of French banks. Noyer said the sector is likely to pass Europe-wide stress tests later this month.

U.S. and European banking shares were higher on Tuesday, with financial stocks one of the best-performing sectors on the S&P 500. Bank of America Corp (BAC.N) shares gained 1.6 percent at $14.06 and the KBW bank index .BKX rose 1.2 percent.

The FTSEurofirst 300 .FTEU3 closed up 2.6 percent at 991.23 points, bouncing back from six-week closing lows.

French banks Societe Generale (SOGN.PA), Credit Agricole (CAGR.PA) and BNP Paribas (BNPP.PA) jumped 4.2 to 6.3 percent.

Mining stocks were also in demand. The STOXX Europe 600 Basic Materials .SXPP rose 5.1 percent after slipping on Monday. The sector has been recently hammered by worries over the pace of the global economy.

Shares of BP (BP.L) rose 3.7 percent as the company said it had no plans to issue stock and talk persisted of sovereign wealth fund interest in the British oil major.

"Markets are a bit oversold. The decline has been quite strong," said Joost de Graaf, senior portfolio manager at Kempen Capital Management in The Netherlands. "There are hopes that second-quarter earnings will be OK and will lift some of the negative atmosphere."

The MSCI world index is still down almost 10 percent for the year. World stocks weakened Monday. U.S. markets were closed on Monday for the Independence Day holiday.

Japan's Nikkei .N225 closed up nearly 1 percent, coming off a seven-week low. Emerging market stocks .MSCIEF jumped 2 percent.

DOLLAR HIT

The more risk-friendly mood hit the dollar, which fell about two-third of a percent against a basket of major trading partner currencies .DXY.

The Australian dollar rallied after the Reserve Bank of Australia's upbeat assessment of the global economy spurred appetite for high-yielding currencies. The rising risk demand also boosted the euro.

Australia's central bank held its key interest rate at 4.5 percent.

"Although Australian monetary officials acknowledged the fact that global growth was slowing, they nevertheless remained positive regarding economic activity in the Asia Pacific," said Boris Schlossberg, a director for currency research at GFT Forex in New York.

The euro rose 0.65 percent at $1.2620. Against the Japanese yen, the dollar declined about a third of a percent to 87.47 yen.

While investors in most markets signaled rising risk appetite, U.S. Treasury debt prices rose as traders added to bets that the Federal Reserve will cling to an easy monetary policy into the second half of 2011 in a bid to avert a double-dip recession.

In the wake of Friday's U.S. jobs report showing a payroll loss for the first time this year, safe-haven appetite for bonds persisted despite the stocks rebound on Wall Street.

Yields on benchmark 10-year U.S. Treasury notes declined 0.04 percentage point to 2.94 percent.

In commodities, U.S. crude oil futures fell 16 cents, or 0.2 percent, to settle down at $71.98. Spot gold fell $15.35, or 1.27 percent, to $1,192.60 an ounce.

(Additional reporting by Richard Leong, Edward Krudy, Angela Moon and Vivianne Rodrigues in New York and Brian Gorman and Naomi Tajitsu in London; Editing by Leslie Adler)