NEW YORK Global equities surged about 2 percent and the euro rallied against the dollar on Friday after an Italian vote on economic reforms eased fears that its debt burden would jeopardize the euro zone's future.
Italy has become the focus of a still uncontained crisis that pushed bond yields of the region's third-largest economy sharply higher this week. Investors feared Italy, the euro zone's third largest economy, could be the next country in the 17-member region to need a bailout.
Italy's Senate approved austerity measures demanded by the European Union that will now go to the lower house, where they are expected to be passed on Saturday. Approval in the lower house will trigger the resignation of Prime Minister Silvio Berlusconi.
Analysts have said Italy's inability to fund itself would pose a systemic risk to the euro zone given the size of its economy and the country's status as the world's third-largest government debtor.
Former European Commissioner Mario Monti is widely expected to take over as head of a broad-based national unity government, a move many investors would welcome.
Adding to the optimism about Europe's efforts to tackle the debt crisis on Friday, former European Central Bank policy-maker Lucas Papademos was sworn in as Greek prime minister, tasked with meeting the terms of a bailout plan to avert bankruptcy.
The euro was up 1.1 percent at $1.3750.
Even as risk appetite increased, analysts said underlying skittishness would keep markets volatile.
Investors hedged against a potential downdraft, with a put-to-call ratio of 13:1 on the Financial Select Sector SPDR (XLF.P), a heavily traded exchange-traded fund of financial shares, said options analytics firm Trade Alert.
Another bearish call was seen in a massive put spread on the January contract of iShares MSCE EAFE Index (EFA.P), an ETF of international shares, options firm WhatsTrading.com said.
The next market test comes on Monday when Italy plans to sell 3 billion euros of five-year government bonds.
"Once a new government is in place, markets will focus intently on whether Italy quickly and forcefully implements the budget deal," said Peter Boockvar, equity strategist at Miller Tabak & Co in New York.
"The stakes cannot be higher, with the world's third-largest bond market staring into the abyss."
Yields on Italian government debt at one point this week rose above 7 percent, a level investors said was unsustainable.
The FTSEurofirst 300 .FTEU3 index of top European shares closed up 2.1 percent at 984.62, led by shares of Italian lender Intesa Sanpaolo (ISP.MI), which rose 8.8 percent.
The Dow Jones industrial average .DJI closed up 259.89 points, or 2.19 percent, at 12,153.68. The Standard & Poor's 500 Index .SPX rose 24.16 points, or 1.95 percent, at 1,263.85. The Nasdaq Composite Index .IXIC gained 53.60 points, or 2.04 percent, at 2,678.75.
Financial shares, seen as vulnerable because of their exposure to European debt, were among the best performers. Bank of America Corp (BAC.N) rose 3.0 percent to $6.21, JPMorgan Chase & Co (JPM.N) gained 1.65 percent to $33.28 and the KBW Bank index .BKX climbed 2.1 percent.
World stocks as measured by MSCI's all-country stock index .MIWD00000PUS gained 2.2 percent.
Brent crude for December delivery rose 45 cents to settle at $114.16 a barrel.
U.S. December crude rose $1.21 to settle at $98.99 a barrel.
"Oil prices continue to build on recent gains from the growing conclusion that the euro zone countries will get past the current debt crisis episode," said John Kilduff, partner at Again Capital LLC in New York.
U.S. December gold futures settled up $28.50 at $1,788.10 an ounce.
The U.S. Treasury market was closed in observance of the Veterans Day holiday.
(Reporting by Angela Moon and Julie Haviv in New York, Doris Frankel in Chicago and Brian Gorman, Zaida Espana in London; Writing by Herbert Lash; Editing by Leslie Adler)