LONDON The euro hit an 11-month high and shares rose on Friday on signs the region's financial system was returning to health and the outlook for Germany, the currency bloc's biggest economy, brightened.
Sentiment was lifted when the European Central Bank said 278 banks in the region would repay a total of 137 billion euros in emergency three-year loans provided just over year ago to avoid a major credit crunch as the debt crisis worsened.
The scale of the repayment, which beat the average of around 100 billion euros produced in a Reuters poll, sent the euro higher, saw German government bond prices fall and lifted bank stocks across the region.
"This is more than we had expected and underlines the material improvement in funding conditions for most European banks in the past twelve months," said Michael Symonds, a credit analyst at Daiwa Capital Markets.
The euro hit a high of $1.3461, up 0.5 percent and its highest level since February 2012, to extend the gains which followed the release of new data showing the German economy gathering speed again after contracting late last year.
German bond futures fell around 20 ticks while two- year Bund yields extended an earlier rise to trade five basis points higher at 0.23 percent.
The main Euro STOXX index of euro zone banking shares was up 1 percent and back to levels seen in mid-2011.
European equity markets, and German shares in particular, had gained ahead of the ECB announcement after the Munich-based Ifo think tank said its business climate index, based on a monthly survey of some 7,000 firms, rose in January to its highest level since June 2012.
The Ifo index followed another business survey on Thursday which suggested Europe's largest economy was set to grow its fastest pace in a year, although that data showed its regional partner, France, may be heading back into recession.
"Germany is roaring back to growth in the new year," said Berenberg Bank Economist Christian Schulz.
Germany's DAX index, home of bellwethers such as Siemens and BMW, hit a five-year high after the Ifo number and only needs to rise a further 4 percent to regain the 2007 peak hit before the start of the global financial crisis.
UK TRIPLE DIP?
Outside the euro zone the economic news was less impressive with Britain reporting that its economy had contracted in the fourth quarter and could be heading for its third recession in four years.
Britain's gross domestic product fell by a greater than expected 0.3 percent in the final three months of 2012 to leave the economy showing virtually no growth for the year
"The UK economy is bouncing along the bottom in the weakest recovery in living memory," Trevor Greetham, Director of Asset Allocation at Fidelity Worldwide Investment, said.
Sterling fell to its lowest in 13-1/2 months against the euro at 85.29 pence and hit a five-month low against the dollar at $1.5745 after the data, though Britain's FTSE 100 stock index barely reacted.
World shares were up about 2 percent overall and at 20-month highs as the latest German data added to upbeat manufacturing reports from the United States and China which showed factory activity at its best levels in two years.
However, these gains were tempered by Apple's disappointing quarterly results this week which have cast a pall over tech-heavy markets across Asia.
MSCI's broadest index of Asia-Pacific shares outside Japan eased 0.4 percent on Friday, for a weekly drop of about 1 percent, its biggest loss in two months.
But the improved outlook for fuel demand implied by the stronger data kept Brent crude above $113, on track to post a second week of gains.
Copper also edged up near two-week highs on Friday on the robust economic data, although prices were set to close the week little changed.
Three-month copper on the London Metal Exchange CMCU3 rose by 0.3 percent to $8,121.50
(Additional reporting by Marc Jones; editing by Philippa Fletcher and Giles Elgood)