Stocks pare early gains; Europe worry persists

The trading floor is pictured at the Frankfurt stock exchange January 16, 2012.

NEW YORK (Reuters) - Stocks, oil and metals prices rose on Tuesday, helped by improved investor sentiment on the economic outlook in China, the United States and Germany, although persistent worries over the euro zone debt crisis pared gains.

After last week's ratings cut of several European countries by Standard & Poor's ended months of speculation over the rating agency's response to credit risks in the euro zone, investors took the downgrade in stride, pouring fresh money into equities and commodity markets.

Much of the gains were fueled by speculation that China may try to boost growth in the near term by tweaking its monetary policy after the country's economy expanded at its weakest pace in 2-1/2 years in the latest quarter.

Oil and copper prices ended up more than 2 percent as the positive sentiment over global growth coincided with news of potential supply issues and geopolitical tensions that heightened bullish fundamentals for those commodities.

Gold hit 5-week highs as the dollar fell for the first time in three sessions against the euro. The single currency hit a session high of $1.2800 early in the global day and stood at around 1.2738 in late trade -- still well up from last week's 17-month low of $1.2624.

European equities, measured by the FTSEurofirst 300 index .FTEU3, finished up 0.85 percent, hitting 5-1/2 month highs. Global stocks, tracked by MSCI All Composite World Index .MIWD00000PUS, gained 0.76 percent.

But lingering concerns over Europe ensured that not all sentiment or actions in markets were positive. With investors closely watching Greece's talks on restructuring its debt to avoid default, U.S. stocks ended sharply off their peaks.

Shares on Wall Street had risen as much as 1 percent as they opened higher after a long weekend, extended by Monday's Martin Luther King Day holiday in the United States. But a late sell-off sparked partly by dismal quarterly results at Citigroup (C.N) cut the market's gain to less than half a percent by the close.

"It was expected that some of the big banks would continue struggling, especially those heavily involved in investment banking because that part of the financial system has clearly slowed down," said Bryant Evans, investment adviser and portfolio manager at Cozad Asset Management, in Champaign, Illinois.

Wall Street's financial stocks were mixed as earnings reports from major banks flowed in. Wells Fargo & Co (WFC.N) settled up 0.7 percent at $29.81 after its quarterly profit topped expectations. Citi, which suffered an 11 percent profit decline, closed down 8 percent at $28.25.

The KBW Bank index .BKX was off 1.4 percent, although it still showed a 9 percent gain on the year.

The Dow Jones industrial average .DJI ended up 60.01 points, or 0.48 percent, at 12,482.07. The Standard & Poor's 500 Index .SPX finished up 4.58 points, or 0.36 percent, at 1,293.67. The Nasdaq Composite Index .IXIC ended up 17.41 points, or 0.64 percent, at 2,728.08.

Markets received an early boost after a gauge of manufacturing in New York State showed growth picked up in January, rising to the highest level in nine months as new orders and employment improved.

Sentiment also got a lift from data showing euro zone consumer prices fell more than expected in December, the start of a retreat from a November peak that could give the European Central Bank more room to cut interest rates as the economy struggles with recession.

German investor sentiment also posted its biggest-ever monthly improvement in January, helped by recent upbeat data and hopes for the European Central Bank's efforts to ease the region's debt problems.

The improving German ZEW investor sentiment index, while encouraging, remained in negative territory, still indicating tough times ahead for the euro zone's largest economy, economists said.

"The (ZEW) index is still consistent with a majority of investors expecting economic conditions to deteriorate in future," said Ben May of Capital Economics.