Global stocks, euro rise on economy, Spanish auction

A man is reflected on an electronic board displaying stock prices outside a brokerage in Tokyo November 10, 2011.

NEW YORK (Reuters) - Global stocks posted their strongest gains in three weeks and the euro rose on Tuesday on signs of improved economic prospects in Germany and the United States, as well as a better-than-expected Spanish debt auction.

U.S. stocks jumped, led by basic materials shares as commodity prices also rallied. Wall Street also got a boost from

a 1-1/2 year high in housing starts and permits for future construction that suggested the housing market was starting to recover.

Bank shares got an extra boost after the Federal Reserve proposed new capital and liquidity rules for the largest U.S. lenders that would likely be in line with international standards.

Traders still kept an eye out for developments that could add to Europe's financial crisis, while thin trading volume near year's end was expected to keep markets volatile.

"From a short-term point of view, we were probably due for a bounce given recent losses, but I don't think we would see a move of this magnitude without the light volume," said Michael Matousek, senior trader at U.S. Global Investors Inc, which manages about $3 billion in San Antonio, Texas.

Global stocks as measured by MSCI climbed 2.3 percent for their best performance since November 30, but the index is still on track to post double-digit percentage losses for the year.

U.S. dollar-denominated Nikkei futures rose 2.4 percent and the European stocks benchmark FTSEurofirst 300 .FTEU3 closed 2 percent higher.

After the closing bell in New York, the Dow Jones industrial average .DJI was up 337.32 points, or 2.87 percent, at 12,103.58. The S&P 500 Index .INX gained 35.95 points, or 2.98 percent, to 1,241.30. The Nasdaq Composite .IXIC rose 80.59 points, or 3.19 percent, to 2,603.73.

On Wall Street, networking stocks advanced after AT&T Inc (T.N) dropped its bid for Deutsche Telekom's (DTEGn.DE) T-Mobile.

On the downside, technology giant Oracle Corp (ORCL.O) reported software and hardware sales that missed its own forecasts, sending its shares down 8 percent after hours.

IMPACT OF EUROPE NEWS

Defying weak expectations, German business morale rose sharply in December, underscoring the resilience of Europe's biggest economy.

Markets have hinged on European headlines for months, as an escalating sovereign debt crisis threatens to take down the bloc's economy.

"Anything that qualifies as a positive datapoint in Europe has an outsized positive reaction in global markets," said Jim Russell, regional investment manager for U.S. Bank Wealth Management in Cincinnati.

The euro gained about 0.6 percent to $1.3077, but it was down from a session high of $1.3131.

Growing expectations that European banks will borrow a large amount from the European Central Bank at its inaugural three-year offer on Wednesday and invest some of the money by purchasing euro zone debt also supported the single currency.

But skeptics abound.

"We think perhaps this is wishful thinking on the part of the marketplace," said U.S. Bank's Russell.

"The best part of the three-year funding agreement via the ECB is basically to provide liquidity as opposed to a carry trade kind of issue," he said.

KEY YIELDS DROP IN EUROPE

Italian and Spanish bond yields fell, with investors hoping banks will borrow three-year funds from the ECB and spend some of the money on higher-yielding debt.

But with Europe's banks being urged by regulators to reduce risk, raise capital and keep lending to business, some lenders may use the fresh funds to repay their own debts and boost their balance sheets.

Italian 10-year government bond yields were about 23 basis points lower at 6.632 percent. Equivalent Spanish paper fell 13 bps to 5.127 percent.

The improved performance of Europe's weaker sovereigns hurt U.S. debt.

"The Treasury market continues to take its main cues from Europe," said Justin Lederer, interest rate strategist at Cantor Fitzgerald in New York.

Safe-haven U.S. Treasuries fell in price, with the benchmark 10-year note down 34/32, the yield at 1.9251 percent, compared with 1.82 percent on Monday.

In the oil market, Brent and U.S. crude futures rose more than 3 percent on the weaker U.S. dollar and threats to supply from Central Asian oil producer Kazakhstan and sanctions-hit Iran.

Copper prices rose 2.3 percent and the Reuters/Jefferies commodity index .CRB gained 2 percent.

(Reporting by Rodrigo Campos; Additional reporting by Ryan Vlastelica and Ellen Freilich; Editing by Kenneth Barry and Dan Grebler)