LONDON The euro hit a six-month high and shares added to recent gains on Tuesday on optimism over Greece's plan to buy back debt and encouraging news from Spain and Portugal.
The FTSEurofirst 300 index of top European shares was up 0.3 percent at 1123.91 points ahead of an expected higher start for Wall Street.
After a mixed open, London's FTSE 100, Frankfurt's DAX and Paris's CAC-40 were all in positive territory, helping the MSCI global share index to add to a five percent rise over the last two weeks.
"Greece is on track with its debt buy back, Spain came out and said it would take the 40 billion for its banks, and Portugal will get its next round of funding," said Heinz-Gerd Sonnenschein, equities strategist at Postbank in Germany.
"Market participants were really encouraged by the Greek buy back, so with it looking like Europe is on track, it is now over to the U.S. (to find a fiscal cliff deal)."
The buyback is a crucial part of a deal reached last week by Greece's international lenders to cut its debt pile and needs to be completed before the IMF can release its share of the aid.
While markets have climbed on progress in the euro zone and signs of faster growth big economies such as China, investors remain wary of the U.S. "fiscal cliff" - $600 billion of impending tax hikes and spending cuts that could push the world's largest economy into recession.
The White House dismissed a proposed deal from Republicans on Monday saying it did not meet President Barack Obama's pledge to raise taxes on the rich.
Investors' are expected to remain focused on budget wrangling during U.S. trading.
In currency markets, the euro extended its recent rally, hitting a fresh six-week high of $1.3091 against the dollar and 1.2116 francs against the Swiss franc.
Adding to the optimism about Greece, Spain formally requested 40 billion euros to bail out its banks at a late night meeting of euro zone finance ministers.
"Overall the euro zone noises are coming out positive, and I don't see any turning around there. The only real deal-breaker, (which) will send the dollar spiking up and risk really off the table, will be if there is a complete breakdown in the Congress negotiations," said Vishnu Varathan, regional economist in Singapore for Mizuho Corporate Bank.
"Right now there is some disappointment here and there, but overall still the consensus is that negotiations will result in some kind of acceptable compromise."
The European single currency's rise helped push the dollar to a six week-month low against a basket of currencies, with its index .DXY falling to 79.663.
The Australian dollar recovered from initial weakness after a widely expected interest rate cut by the Reserve Bank of Australia (RBA). The rate was trimmed by 25 basis points to 3.0 percent, matching the previous record low.
Commodities struggled, however, as weak manufacturing data and the U.S. budget talks fanned concerns about the health of the global economy and prospects for energy demand.
Oil and gold both lost ground, while copper was little changed. Brent crude oil dipped to $110.60 a barrel, and gold fell about 1 percent to its lowest in nearly a month after prices broke below key support levels.
With the euro zone mood lifting, Spanish, Italian and Greek bonds rose while German Bunds stayed on the back foot, though losses were limited by the potential impasse in budget talks.
Italian 10-year yields fell 5 basis points to 4.40 percent, while the Spanish equivalent was 3 ticks down at 5.24 percent, extending Monday's falls after Greece unveiled better-than-expected terms for the debt buyback.
(Additional reporting by Emelia Sithole-Matarise; Editing by Will Waterman and Anna Willard)
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