GLOBAL MARKETS-Shares gain, euro steady as Cyprus fears ease
* European shares up over one percent after PMI data
* U.S. stock futures signal Wall St recovery
* Safe haven bonds gain as Cyprus fears recede
* Euro holds steady as focus turns to ECB meeting
London, April 2 (Reuters) - European shares recovered from a two-week slide on Tuesday and the euro steadied as fears of a resurgence in the region's debt crisis emanating from Cyprus receded.
A slight improvement in the euro zone Purchasing Managers' Index, which tracks the region's manufacturing economy, also supported sentiment. The PMI for March was 46.8, still showing contraction but up from a preliminary estimate of 46.6.
Europe's FTSEurofirst 300 index gained over one percent by midday, retracing more than two thirds of a pull-back that began in mid-March, when Cyprus's bailout plan raised fears of a bank run in the euro zone's most indebted countries.
Across Europe Paris's CAC-40 and Frankfurt's DAX were up 1.2 percent, while Spain's IBEX gained 0.7 percent and Italy's FTSE MIB 0.7 percent.
"We're re-testing previous highs on European indices and then there's just a little bit of a short squeeze going on," said Matt Basi, head of UK sales trading at CMC Markets.
London's main FTSE 100 index also gained 1.0 percent amid the buying helped by a separate UK PMI index that came in at 48.3, just above February's surprisingly poor reading of 47.9.
"Although the manufacturing PMI is still pointing to contraction, at least it not going the wrong way and we are still creeping higher," said Alastair Winter, chief economist at Daniel Stewart.
However, weaker-than-expected manufacturing data from China and the United States on Monday, which highlighted the fragility of the global economic recovery, left the broad MSCI world equity index with only a modest gain of 0.2 percent.
The strong rise in European equities did help U.S. stock index futures to rebound from their previous day's losses, putting the benchmark S&P 500 again within striking distance of its all-time intraday high of 1,576.09.
Wall Street had fallen sharply after the U.S. factory data, which was seen as suggesting a cooling economy, though any moves this week may be limited by the approach of the closely watched U.S. monthly payrolls report on Friday.
EURO HOLDS STEADY
As fears of a major financial meltdown emanating from Cyprus began to recede, German government bond futures fell and Italian and Spanish bonds made small gains, while the common currency held steady against the dollar.
Under an international bailout agreed just over a week ago, Cyprus imposed capital controls and made depositors with more than 100,000 euros ($128,500) in its major banks contribute to the rescue deal.
The deal was the first in euro zone history to make savers share the burden. However, after Cyprus's banks reopened in orderly fashion on Thursday, fears of bank runs across the euro zone eased.
As a result German Bund futures hit a low of 145.12, down 37 ticks on the day, with traders closing out positions used to hedge against contagion from Cyprus hitting the region's other struggling states such as Spain and Italy.
Italian 10-year yields were down 4 basis points on the day at 4.7 percent while equivalent Spanish yields were down by the same amount at 5.02 percent.
Italian yields have risen 21 bps since March 22, due in part to its struggle to form a government after elections in February failed to produce a clear winner.
Italy's president acknowledged on Saturday that he had limited scope to force divided political parties to find a solution, but ruled out standing down early to make way for new parliamentary elections.
In currency market the euro was flat against a mostly steady dollar to trade around $1.2840, and remained well above last week's four-month low of $1.2750.
Investors are cautious about making any major moves on the single currency before a European Central Bank policy meeting on Thursday.
Interest rates are expected to be left on hold at the meeting though bank boss Mario Draghi could express concern about the euro zone's outlook at a subsequent news conference.
"As the fundamental outlook for the euro region turns increasingly bleak, the ECB remains poised to strike a dovish tone for monetary policy," said David Song, currency analyst at DailyFX.
The dollar, which slid on Monday's weak factory data, was also steady against a basket of currencies. It gained support from a weaker yen, which slipped on talk of monetary easing in Japan when the central bank meets later this week.
Oil and copper, both sensitive to industrial demand, fell initially as investors focused on Monday's official Chinese factory activity report which, like the U.S. figures, was below forecasts.
But oil prices recovered modestly from their lows when Saudi Oil Minister Ali Al-Naimi said demand was expected to rise in the next few months as demand from Asia gains strength.
Brent climbed back above $111 a barrel to around $111.55 after the Saudi minister's comments while U.S. crude futures were down 12 cents to $96.95 a barrel as a pipeline leak in Arkansas weighed on demand.
Gold was steady just under $1,600 an ounce after it had rallied to a 1-month peak in March on worries about stability in Europe as politicians scrambled to clinch the Cyprus bailout.