NEW YORK (Reuters) - World stocks hit a three-month high and the euro gained on Tuesday as investors drew encouragement from signs that Europe is edging toward resolving its debt crisis even as the economic impact in the region worsens.
Global markets have enjoyed a strong run this week after the European Central Bank indicated it may start buying government bonds again to ease the pressure on Spain and Italy, albeit under strict conditions that have yet to be fully worked out.
Investors are also watching for signs that the Federal Reserve will take any fresh measures to bolster the U.S. economy when it meets next month. Eric Rosengren, president of the Boston Federal Reserve Bank, said on Tuesday the central bank should launch another bond-buying program of whatever size and duration is necessary to get the economy back on its feet.
Many analysts expect the Fed could launch a third round of bond-buying, known as quantitative easing, when it next meets, in mid-September. Richard Fisher, president of the Dallas Fed and a monetary policy hawk, on Monday told Reuters that taking new steps so close to November's presidential election would be a mistake.
U.S. stocks were higher in the early afternoon, with the S&P 500 hitting the psychologically important 1,400 level for the first time since early May.
"Lots of people are starting to discount the fundamental issues in Europe and are now embracing risk. Spanish yields have come in, so the fire is not out, but they seem to be containing it better," said David Lutz, head of ETF trading at Stifel Nicolaus Capital Markets in Baltimore.
Oil prices extended gains on expectations of further economic stimulus, as well as supply worries with falling North Sea output expected in September, Middle East tensions and the Gulf of Mexico hurricane season. Brent crude futures pushed above $111 a barrel.
Highlighting the importance of quick action, data showed that Germany, Europe's economic powerhouse, took a bigger hit than expected in June with industrial orders falling 1.7 percent. Contracts from the euro zone fell by 4.9 percent.
The cautious hopes that Europe's three-year crisis was edging toward a solution lifted the MSCI world equity index 0.8 percent, its highest level since early May.
The Dow Jones industrial average gained 96.91 points, or 0.74 percent, to 13,214.42. The Standard & Poor's 500 Index rose 12.13 points, or 0.87 percent, to 1,406.36. The Nasdaq Composite Index climbed 34.94 points, or 1.17 percent, to 3,024.85.
Still, volume was light, with about 2.02 billion shares traded on the New York Stock Exchange, NYSE Amex and Nasdaq near midday. Average daily volume in 2012, to date, is 6.69 billion.
Equities markets have enjoyed renewed demand from investors over the past three months as high-rated government bond returns have fallen sharply due to demand from investors seeking safety from the troubles in Europe, increasing the relative attractiveness of blue-chip stocks.
European shares had a choppier day after the disappointing German data, while Italy's recession extended into a fourth consecutive quarter.
Oil stocks got a boost from rising crude prices, helping the FTSEurofirst 300 index of top European companies finish up 0.8 percent at its highest level in more than four months.
A sharp drop in shares of Standard Chartered Plc (STAN.L) after New York's bank regulator threatened to tear up its state banking license weighed on European bank stocks.
"We're more enthusiastic about oil stocks than banks. Higher oil prices will be beneficial and equity markets are continuing to be supported by the fact that central banks appear ready to ride to the rescue," said Cheviot Asset Management partner David Miller.
Standard Chartered plummeted more than 16 percent after the New York State Department of Financial Services said the British-based lender hid $250 billion in transactions tied to Iran.
The euro was still basking in the glow of ECB President Mario Draghi's promise that the central bank was "ready to do whatever it takes to preserve the euro," and the expectations it would intervene to help Spain and Italy.
The euro gained for a third day against the dollar, climbing 0.2 percent to $1.2423. It hit a one-month high of $1.2443 on Monday.
Investors, however, remain cautious about the next steps, as ECB action can be triggered only when a country decides its finances are in such bad shape that it needs a bailout, which could arouse new fears about the whole region.
"Skeptics remain and the ECB will have to replace rhetoric with action sooner than later for this upward move to gain any momentum," said Matthew Lifson, senior trader and analyst at Cambridge Mercantile Group in Princeton, New Jersey. "There are still people predicting the $1.2000 level in the euro by year end."
The ECB could resume bond buying - possibly as soon as September - that will target shorter-dated sovereign debt and aim to complement the combined firepower of the region's two bailout funds while keeping the pressure on governments to reform.
But the euro zone's new permanent bailout fund has yet to be formally approved by paymaster Germany, and rules governing any ECB bond buying still have to be agreed by internal committees at the central bank.
Brent crude for September delivery rose $2.73 to $112.28 a barrel, climbing above $110 a barrel for the first time since mid May. U.S. crude jumped $1.85 to $94.05.
(Additional reporting by Sudip Kar-Gupta in London and Gertrude Chavez-Dreyfuss and Anna Louie Sussman in New York; Editing by Leslie Adler)