NEW YORK The euro neared a two-year low on Tuesday as investors fretted about Spain's troubled banking system, but global stocks jumped on speculation Greece would stay in the euro zone and news that China would take new measures to stem an economic slowdown.
The euro fell further below $1.25 after Egan-Jones Ratings cut Spain's credit score for the third time in less than a month, saying the need to support the country's banks was putting new strains on Spanish public finances.
The euro fell to lows versus the U.S. dollar last seen in since July 2010, as Spain's 10-year borrowing costs rose to 6.54 percent. The euro traded down 0.3 percent to $1.2503.
Spanish stocks also fell and Spain's borrowing costs held near six-month highs after a source said the government would issue new debt to recapitalize troubled lender Bankia.
European Central Bank officials declined to comment on speculation of further action to bolster banks in the euro zone.
"The rumor mill has been busy, with talk of an ECB press conference about bank recapitalization, supporting the euro and giving euro zone stocks upside momentum," said Saxo Bank Chief Economist Steen Jakobsen, in Copenhagen. "We do not believe in it, for the record."
MSCI's all-country world equity index .MIWD00000PUS rose 0.9 percent to 303.71, while the FTSEurofirst 300 .FTEU3 of top regional shares closed up 0.7 percent at 990.99.
Stocks on Wall Street rose on renewed hopes Greece will stay in the euro zone after Greek election polls pointed to support for pro-bailout parties in elections next month.
The major U.S. indices were up more than 1 percent even though Facebook Inc (FB.O) hit a new low of $28.65, with losses accelerating after falling through the $30 per share barrier.
The Dow Jones industrial average .DJI added 125.86 points, or 1.01 percent, to end at 12,580.69. The Standard & Poor's 500 Index .SPX was up 14.60 points, or 1.11 percent, at 1,332.42. The Nasdaq Composite Index .IXIC was up 33.46 points, or 1.18 percent, at 2,870.99.
Investors took heart from polls showing a party that backs Greece's international bailout was leading ahead of a June 17 election. If the New Democracy Party can form a government, Greece would be less likely to quit the euro.
"There's increasing hope that the more conservative party will win out in Greece, which is enough to spur some buying today," said Mark Luschini, chief investment strategist at Janney Montgomery Scott in Philadelphia.
Reports that China was planning a new round of stimulus spending to boost lending and growth also cheered stock markets and briefly boosted oil prices, which later slipped on the Spain downgrade and Middle East supply worries.
Traders also appear to be anticipating better-than-expected economic news this week. U.S. May jobs and Institute for Supply Management reports are due on Friday, noted Fred Dickson, chief market strategist at D.A. Davidson & Co in Lake Oswego, Oregon.
Still, a high degree of caution marked trading in the bond markets.
U.S. government debt prices slipped in late trade and the yield on Germany's 10-year bond hit a record low as doubts grew over Spain's plan to recapitalize its banks and obtain financing for its struggling regional governments.
"It's mostly how you solve the Spanish bank problem, so there's a bit of safe-haven buying," said David Keeble, global head of interest rates strategy at Credit Agricole Corporate & Investment Banking in New York.
U.S. Treasury prices retreated late in the session after yields on 10-year U.S. debt came within striking distance of the 1.67 percent level reached in September - the lowest in at least 60 years.
The benchmark 10-year U.S. Treasury note was unchanged in price to yield 1.75 percent. Benchmark 10-year German Bund yields touched a new low before edging up to 1.356 percent. The June Bund futures contract also hit a record high of 144.58, but later fell to 144.31.
Spanish debt rose within 46 basis points of the 7 percent threshold that was the tipping point that forced other euro zone countries such as Portugal and Ireland to seek emergency rescues.
Kathy Lien, director of research at GFT Forex in Jersey City, New Jersey, said such a spike could add to pressure on the euro.
Current prices, she said, "suggest everyone who wants to be short the euro is already short," but "the next catalyst could come from a rise above 7 percent in Spanish yields, which would accelerate selling."
Markets barely reacted after a private sector report showed U.S. consumer confidence unexpectedly cooled in May, falling to the lowest level in four months as Americans became more pessimistic about the job market and economic outlook.
Another report showed U.S. home prices edged higher for the second month in a row in March, suggesting prices are stabilizing as the housing recovery gains momentum.
Brent oil futures settled down 43 cents at $106.68 a barrel. U.S. light sweet crude oil fell 10 cents to settle at $90.76 per barrel.
Gold fell as the euro's slide on worries over Spanish debt prompted investors to sell the precious metal along with other dollar-sensitive commodities.
U.S. gold futures for June delivery settled down $20.20 at $1,548.70.
The Reuters/Jefferies CRB Index .CRB fell 0.78 percent at 279.74.