* Markets rally masks concern about Europe growth strategy
* Greece increasingly seen as isolated euro zone case
* ECB cash eases euro zone tensions, for now
* Soros concerned about "deflationary debt spiral"
By Paul Carrel and Paul Taylor
DAVOS, Switzerland, Jan 25 There is a palpable sense of hope at the annual Davos World Economic Forum that the euro zone is pulling back from the brink of catastrophe but business leaders are equally worried that Europe's woes will hold back a global recovery.
A growth strategy is the missing ingredient in the policy cocktail that euro zone leaders are mixing to save the currency bloc from break-up. Without economic recovery, re-election will be tough for presidents in Europe and beyond this year.
The 2,600 political and business leaders attending the five-day Davos Forum met against a backdrop of improved market sentiment driven by signs the euro zone may escape recession and that intense market pressure on Italy and Spain is easing.
Greece is clinging to hope of a bond swap to avoid a starker default, although a deal is far from assured. But markets seem relatively unconcerned at the prospect of an enforced Greek default, seeing the problem increasingly as a one-off event divorced from developments elsewhere in the euro zone.
"I think we are on the verge of putting the acute phase of the crisis behind us," said billionaire investor George Soros, adding that he believed Italian sovereign bonds represent a "very attractive" speculative investment.
"If we pass the Greek potential default, if we put that behind us, I think we will be past that phase where the financial markets are on the verge of a possible meltdown," he said. Concerning Soros more than a possible Greek default were the austerity measures demanded by Germany. These, he said, would cause a "deflationary debt spiral".
Germany insists other euro zone states must pursue the kind of structural reforms that helped it regain competitiveness in the last decade. Opening the meeting, German Chancellor Angela Merkel said Europe's leaders had shown by their actions in 2011 that they were committed to the success of the European project.
"Europe will be a more attractive place to invest and do business when we get through this crisis, and we will get this crisis. I'm certain," Merkel said.
The prevailing mood among delegates was that the bloc had made progress - aided by European Central Bank liquidity and tighter fiscal rules - but that growth was still missing.
Markets have rallied on promising signs from Europe - the broad MSCI world equity index is up some 5 percent for the year so far - but this rally appears to be losing steam and masks underlying concerns about growth.
"I think Europe has moved a long way in the last two or three months in the direction of actually getting to policies which could stabilise this situation," said Stanley Fischer, governor of Israel's central bank.
But only 40 percent of chief executives worldwide are "very confident" of revenue growth for their companies in the next 12 months, down from 48 percent in 2011, a PricewaterhouseCoopers (PwC) survey of 1,258 CEOs showed on Tuesday.
Even if growth returns to Europe, the politics on the way out of the crisis have opened up divides between North and South, Germans and Greeks, Britain and the rest of Europe, said Oxford Professor of European Studies Timothy Garten Ash.
"The scale of resentment is a huge political problem. We won't come out with a sense of optimism of surging forward," Garton Ash said.
The ECB - rather than government leaders - won widespread praise at the Forum for acting decisively to stem the crisis.
Under ECB President Mario Draghi, who took the job in November, the central bank has funnelled almost half a trillion euros in cheap, 3-year loans to banks in an effort to head off a credit crunch and give them the means to buy sovereign bonds.
There are signs the ploy is working, with investors flocking to buy Spanish bonds and Italian yields well below the 7 percent level that alarms markets, despite Standard & Poor's downgrading the credit ratings of nine euro zone countries this month.
"What it is providing at the margin is extra demand for the shorter term debt of the most affected countries, Italy and Spain," Bank of Canada Governor Mark Carney said of the measure.
"(This) provides some room for manoeuvre for those countries to undertake very difficult fiscal and structural reforms which are absolutely going to be necessary to right this in the medium term," he told Reuters.
But he said tackling these structural reforms would take a "more determined, consistent effort over a number of years."
In Germany, a survey on Wednesday showing business morale rose in January signalled that Europe's largest economy is set to avoid recession
But the latest forecasts suggest Greece and Portugal are stuck in deep recessions, reducing their revenues and their ability to meet fiscal targets. Spain and Italy are expected to be in recession this year and next, raising the same concerns.
EU leaders will hold a summit next Monday devoted to putting forward a growth strategy. But it will be largely about pledging labour market reforms, shifting taxation from labour to consumption and better targeting existing and unspent EU funds, with no new public money on the table.
Given Europe's very limited resources, the growth strategy risks being seen as largely declaratory wishful thinking.
The euro zone crisis is hurting the bloc's neighbours.
Erik Berglof, chief economist at the European Bank for Reconstruction and Development (EBRD), said a requirement for European banks to increase their core capital buffers was having an impact to the east of the 17-country bloc.
"A lot of measures are being taken by governments in the euro zone to protect their own interests," Berglof said. "All this is leading to a very rapid deleveraging in Eastern Europe."
He was working on a move similar to the 2009 Vienna Initiative to maintain west European banks' exposure to eastern Europe: "The basic objective of achieving a more coordinated deleveraging is the same."
For others, the euro zone crisis poses a buying opportunity.
A survey of 800 business leaders in Asia, the Middle East and North America by FTI Consulting found that 45 percent of companies in Asia are either executing or looking to make acquisitions in Europe in the next 12 months, compared with just 14 percent in the Middle East and 7 percent in North America.
For Turkey, straddling the divide between Europe and Asia, the European project is still an attractive proposition.
"Cheer up Europe. You have seen worse. We have seen worse. In European history we have put much more devastating crises behind us," Turkey's Europe minister, Egeman Bagis, said at the Forum.
"Europe is still the best place to be, which is why my country is still determined to join."