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(Updates prices, adds quotes)

Written By My First Web Blog on Tuesday, September 13, 2011 | 12:55 AM

(Updates prices, adds quotes)

* Euro STOXX 50 futures up 1.1 percent

* Reports on China support for Italy spark short covering

* Nikkei up 1 percent; MSCI AP ex-Japan flat

* Euro holds above 7-month lows; Italy auction eyed

* Gold bounces after falling more than 2 pct on Monday

By Alex Richardson

SINGAPORE, Sept 13 (Reuters) - European index futures rose and the euro edged off a seven-month low on Tuesday after a report that Italy may get financial support from China sparked a bout of short-covering but did nothing to ease fears that Europe is sliding into another banking crisis.

Asian shares staged a modest rebound, but growing expectations of a Greek debt default, sharp drops in French bank shares on Monday due to their sovereign exposure and a surge in Italian bond yields meant sentiment remained fragile and any rally was likely to be short lived.

"There are still enormous challenges facing the European system at this point and fears around a default in Greece are very high and it's hard to see that changing any time soon," said Greg Gibbs, a strategist at RBS in Sydney.

The dollar eased broadly, helping lift dollar-denominated commodities such as gold, copper and crude oil.

Euro STOXX 50 index futures STXEc1 rose 1.1 percent, and DAX FDXc1 and CAC-40 FCEc1 futures were also up more than 1 percent , while financial bookmakers called the FTSE 100 to open up as much as 1.4 percent .

In Asia, Japan's Nikkei share average rose 1 percent and Australia's benchmark index gained 0.9 percent, while MSCI's broadest index of Asia Pacific shares outside Japan was flat .

The MSCI index is nearly 20 percent below its 2011 high reached in April. A fall of 20 percent or more is the generally accepted definition of a bear market.

U.S. stocks bounced back late in Monday's session after a report that Italy could get financial support from China tempered investors' worst fears over the euro zone debt crisis.

S&P 500 index futures ESc1 were flat in Asia on Tuesday, suggesting Wall Street's gains may run out of steam.

Market sell-offs like those of the last six weeks -- driven by the euro zone crisis and fears of renewed recession in the United States -- are often punctuated by "short-covering" rallies, when traders buy to realise profits on bets that an asset would fall in price.


The Financial Times reported that Italy had asked China to make "significant" purchases of Italian debt. Italy has seen its borrowing costs spike in recent weeks on doubts about the political will in Rome to tackle its swollen debt.

Greece warned on Monday it would run out of cash next month without the next tranche, around 8 billion euros, of a bailout loan. Euro zone policymakers have threatened to withhold the money as patience with Athens' repeated fiscal slippages wears thin.

A growing number of policymakers, as well as market economists, are convinced it is only a matter of time before Greece, which keeps falling behind on its fiscal targets after two EU/IMF bailouts, will have to default.

"The contagion impact of a default will be severe, because next in the firing line will be Italy, Spain and it will take in the whole of the European banking sector too," Suki Mann, a strategist at Societe Generale, wrote in a note.

In currency markets, the euro inched up to around $1.3670 against the dollar after falling to a seven-month low of $1.3495 in the previous session, though any signs of weak demand at an Italian bond auction later in the day may see the single currency fall back again.

"All eyes are squarely on that seven-month low around $1.35 hit overnight," said Koji Fukaya, director of global foreign exchange research at Credit Suisse Securities in Tokyo.

"The downtrend in the euro will surely continue, but my sense is that unless the Italian bond auction goes extremely badly, this level may hold today."

The dollar index , which tracks the U.S. currency against a basket of major peers, fell 0.6 percent .

The weaker greenback made dollar-denominated assets cheaper for holders of other currencies.

Copper rose 1 percent to $8,840 a tonne and oil also gained, with U.S. crude CLc1 up 0.7 percent at $88.85 a barrel and Brent crude LCOc1 rising 0.5 percent to $112.81 , although traders remained wary.

"This is a shallow bounce because of Wall Street ending higher, so there is some confidence returning, but I don't think anybody would be putting any big positions given the global situation," said Victor Say, an analyst at Informa Global Markets in Singapore.

Gold bounced about 0.8 percent to around $1,828 an ounce, after dropping by more than 2.5 percent in the previous session, also supported by the safe-haven appeal that drove it to a record high of $1,920.30 last week.

"There is a slow-motion train wreck going on in Europe at the moment, which is going to be relatively supportive of gold," said Nick Trevethan, senior commodities strategist at ANZ.

"All the factors that have been supporting gold for the past few months are still there. Nothing has changed." (Additional reporting by Saikat Chatterjee in Hong Kong, Ian Chua in Sydney, Antoni Slodkowski and Lisa Twaronite in Tokyo and Alejandro Barbajosa in Singapore; Editing by Kim Coghill)

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