Bargain hunters helped European stocks higher approaching the close on Tuesday, spurred on by gains in the United States, where indexes turned positive after early weakness.
This afternoon the FTSEurofirst 300 was up 1.94 points, or 0.2pc, at 1,096.29, bouncing off a session low of 1,086.37.
Traders cited a number of potential catalysts for the rebound including technical reasons and hopes of a rescue package for Greece and Spain being agreed and an early resolution to U.S. fiscal cliff.
Earlier worries about the looming fiscal crisis in the United States kept U.S. share markets under pressure, with stock index futures pointing to a lower start on Wall Street.
Investors had initially sold shares and the euro in reaction to a public dispute between the euro zone and the IMF over the longer-term target date for Greece to shrink its debts which threatened to rekindle the region's crisis.
The MSCI world equity index was down 0.3pc to 321.90 points by lunchtime, off its lows for the day but down at a level not seen since early September.
German newspaper Bild said Berlin was working on a single aid package of more than €44bn to cover Greek debt repayments this year. Shares trimmed their losses and the euro gained following the report, which cited government sources.
A finance ministry spokeswoman said no final decision had been made on the next loan payments to Greece, and it was not clear when any jumbo funding might go through. H owever, the report soothed some fears that Athens might default and have to leave the euro zone.
"If there are signs that Greece could get a disbursement before they run dry of money that would give the euro a boost," said Dag Muller, technical analyst at SEB.
The FTSE Eurofirst 300 index index of top European shares which had been down over down 0.6pc, recovered to be off 0.35 percent at 1,090.18. London's FTSE 100, Paris's CAC-40 and Frankfurt's DAX all fell over 0.5pc.
EUROPE FEARS REKINDLED
The euro started weaker after euro zone finance ministers said Greece should be given until 2022 to meet a goal for reducing its debt mountain to a more manageable level, but International Monetary Fund chief Christine Lagarde insisted the existing target of 2020 should stay.
Behind the differences was a debate over whether euro zone governments should write off some of their Greek debt holdings to help Athens, an idea which Germany opposes.
A weak German ZEW investor sentiment survey, which showed a drop to -15.7 in November from -11.5 in October, also heightened concerns about the impact of the euro zone crisis on Europe's largest economy and knocked the euro.
Analysts said the ZEW index had increased the likelihood of a recession in Germany.
"The ZEW looks broadly consistent with economic stagnation in Germany. But we think the economy will slide back into recession next year as the peripheral debt crisis intensifies and business and consumer confidence weaken further." said Jennifer McKeown, European economist at Capital Economics.
US markets focused on the return of lawmakers to Washington after last week's elections, with only seven weeks to reach agreement on scheduled automatic tax hikes and budget cuts that threaten to trigger another recession.
President Barack Obama has scheduled talks with business, civic and labour leaders on Tuesday before of a meeting set for Friday of top Republicans and Democrats in Congress.
Analysts say a failure to reach a compromise would also threaten the Federal government's ability to keep borrowing, and could see its credit rating downgraded.
S&P 500 futures SPc1 were down 0.4pc at 1,372.50 points, Dow Jones industrial average futures dropped 0.4pc and Nasdaq 100 futures fell 0.6pc.
U.S. Treasuries also reflected the growing concerns that a compromise may be difficult to achieve with 10-year yields falling to 1.593 percent from 1.613pc on Friday. The U.S. Treasury market was closed on Monday for the Veterans' Day holiday.
Earlier MSCI's broadest index of Asia-Pacific shares outside Japan dropped 1 percent to hit a seven-week low after shares in China and Hong Kong fell sharply on worries about the outlook for the world's second largest economy.
The falls were triggered when China's state media reported that government curbs on the housing market would remain, raising fears that the Communist Party congress would bring little change in economic policies.
The uncertainty over the euro zone's debt problems and the caution over a U.S. fiscal policy standoff spread across the commodity markets.
U.S. crude futures fell 0.25pc to $85.40 a barrel and Brent dropped 0.5pc to $108.56.
"There is plenty of oil and the market is well supplied, but t he economic outlook both in the United States and Europe is weak and that's putting downward pressure on prices," said Ken Hasegawa, a commodity sales manager at Newedge Japan.
Gold fell 0.1pc to $1,726.24 an ounce, down from a 3-week high of around $1,738 struck on Friday. Despite the recent fall, gold is still up around 10pc so far this year.
"Gold's rally may be starting to show signs of topping out, as investors seem to be discounting the possibility of a fiscal cliff deal being reached," INTL FCStone said in a note.