TOKYO (Reuters) - Shares and riskier assets recovered on Tuesday from the previous day's plunge, as sentiment improved on hopes Spain would use public funds to bolster its struggling banks, although wariness remained over Greece.
U.S. stocks ended nearly flat and most European markets rose after an anti-austerity backlash by voters in Greece and France caused initial jitters across markets, sending the euro and Asian stock markets to their lowest levels in three months.
Bank stocks outperformed, with European blue-chips rallying while on Wall Street, the KBW bank index .BKX gained 1 percent as Spain signaled it was opening the door to using public funds to aid the country's troubled lenders.
MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.3 percent on Tuesday, after sliding over 2 percent the day before for its worst daily fall in about five months.
Japan's Nikkei stock average opened 0.8 percent higher, after suffering its biggest fall in six months and hitting a three-month low on Monday.
"After fears regarding the week-end elections, markets return to what they do best, namely range trading and squeezing concentrations of positions," said Sebastien Galy, strategist at Societe Generale, adding that the next key events included negotiations for a coalition government in Greece and the announcement of some form of bad bank scheme for Spain.
The chairman of ailing Spanish lender Bankia SA stepped down on Monday, and sources said a government announcement on Bankia could come on Friday once the successor is in place.
GREECE BACK IN FOCUS
The euro steadied above $1.30, off Monday's low of $1.2955 hit when the defeat of incumbents in Greece and France raised fears that Europe's collective efforts to tackle fiscal austerity and resolve the euro zone's debt crisis may falter.
Another gauge of investor appetite, the Australian dollar, also recovered from a four-month low of $1.0110 hit on Monday.
The elections underscored deep public resentment against using severe austerity measures to solve Europe's refinancing problems, prompting the International Monetary Fund (IMF) to show some new flexibility on Monday over how quickly it would press deeply indebted countries to bring their budgets under control if economic growth weakens.
Its shift in tone could prove important for Greece, where Europe's sovereign debt crisis began in 2009.
Sunday's election stripped Greece's two mainstream parties that backed a painful European Union/IMF bailout of their parliamentary majority, reviving uncertainty over whether Athens will stay in the euro zone.
While strict fiscal discipline could aggravate the already shrinking euro zone economy, some analysts caution that pursuing growth-oriented policies also won't help solve the core debt issue.
"European issues are more structural than cyclical, with external and fiscal imbalances at the core. This implies that boosting growth with more spending or lower taxes would only bring temporary relief, at best, as borrowing against future demand would only exacerbate solvency concerns," said Barclays Capital analysts in a research.
"Bank recapitalization seems to be the best option for Europe to get the biggest bang for their bucks," they said.
Oil rebounded on Tuesday, with U.S. crude futures up 0.1 percent at $98.01 a barrel after tumbling to a low of $95.34 on Monday. Brent crude futures rose 0.2 percent to $113.37, off Monday's lows near near $110 per barrel.
Sentiment was slightly better in Asian credit markets, with the spread on the iTraxx Asia ex-Japan investment-grade index tightening by 1 basis point early on Tuesday.
(Editing by Richard Pullin)
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