GLOBAL MARKETS-Shares, euro rise as investor sentiment warms

Wed Dec 19, 2012 1:26pm EST

* World shares at 17-month highs, European stocks up 0.4 pct

* Wall Street wavers after strong two-day rally

* Euro at multi-month highs vs dollar, yen

* Brent crude rises close to $110 a barrel

By Herbert Lash

NEW YORK, Dec 19 (Reuters) - World shares rose to 17-month highs and the euro surged on Wednesday as hopes grew for a year-end budget deal in the United States and the economic outlook for Germany improved, but Wall Street faltered after a two-day rally.

A key business survey in Germany bolstered investor sentiment by suggesting that Europe's biggest economy was likely to bounce back quickly from a slowdown.

The growing German confidence lifted the euro to a 16-month high against the yen and an 8-1/2 month peak versus the U.S. dollar, while Brent oil rose toward $110 a barrel.

But a sense that American politicians were getting closer to an agreement to avert the "fiscal cliff" - steep tax hikes and spending cuts that will take effect in the new year - was not enough to push the broad U.S. equity market higher.

"The question has shifted to what a deal will look like and entail, and markets are taking a pause as we consider that," said Scott Eldridge, director of portfolio management at Caprin Asset Management in Richmond, Virginia.

"It seems like all the parties at the table have made steady progress, but it continues to drown out all the other noise in markets."

Strong results from Oracle lifted U.S. technology shares, but the S&P 500 struggled to extend its best two-day run in a month.

Investors gave little importance to data that showed U.S. homebuilding permits touched their highest level in nearly 4-1/2 years in November, pointing to strength in the housing market, even though ground-breaking activity dropped.

The Dow Jones industrial average was down 9.19 points, or 0.07 percent, at 13,341.77. The Standard & Poor's 500 Index was down 2.34 points, or 0.16 percent, at 1,444.45. The Nasdaq Composite Index was up 2.70 points, or 0.09 percent, at 3,057.23.

In Europe, top company shares scaled fresh 18-month highs on expectations the U.S. fiscal debacle will be averted.

The FTSEurofirst 300 index rose 0.41 percent to end at 1142.13, just off a 19-month closing high.

The better tone in global markets was supported by the U.S. Federal Reserve's efforts to boost the U.S. recovery, signs of growing economic momentum in China, and talk that Japan is set for a policy shift to lift itself out of recession.

The latest German Ifo Institute survey of 7,000 firms bolstered this sentiment by finding that business confidence had improved for a second straight month in December, in part because of better export prospects.

The brighter outlook has pushed MSCI's all-country world equity index to levels last seen in July 2011. The index rose 0.39 percent to 342.77 on Wednesday, on track for its fifth straight weekly gain.

The yen weakened to its lowest point in more than 18 months against the dollar on expectations the Bank of Japan will ease monetary policy at the end of a two-day policy meeting on Thursday.

The euro rose 0.13 percent to 1.3246 to the dollar after hitting 112.49, its highest since August 2011. Against the yen, it gained 0.42 percent to 111.84, its highest since August 2011.

The dollar index fell 0.11 percent to 79.271 after hitting a two-month low of 79.008.

The benchmark 10-year U.S. Treasury note rose 5/32 in price to yield 1.8031 percent.

Brent crude was up $1.17 to $110.01 a barrel as it headed toward its highest close in two weeks. U.S. oil gained $1.62 to $89.55.

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