European shares rebounded in midday trade on Wednesday after China unexpectedly cut its ratio of obligatory bank reserves, temporarily offsetting concerns about the eurozone debt crisis, dealers said.
However, investor sentiment remains clouded after eurozone finance chiefs failed to lift the region's bailout fund to one trillion euros, while Standard & Poor's cut its ratings on 15 major global banks overnight.
European stocks rose after falling early on.
London's FTSE 100 index gained 0.75 percent to 5,377.65 points, Frankfurt's DAX 30 added 1.18 percent to 5,868.60 points and the Paris CAC 40 won 0.54 percent to 3,043.08. Milan was up 0.88 percent and Madrid rose 0.44 percent.
But the euro dropped to $1.3289 from $1.3317 late in New York on Tuesday.
China's central bank said on Wednesday it will cut the reserve requirement ratio for the country's banks by 0.5 percent, in the strongest move yet to ease restrictions on lending.
The move, which takes effect on December 5, is a sign that the government is easing tight credit restrictions put in place to curb surging inflation and property prices.
The People's Bank of China said in the brief statement that it will reduce the ratio by 0.5 of a percentage point, effectively increasing the amount of money banks can lend.
"The move will ease constraints on bank lending. More important, though, is the signal this gives to the markets and to investors," said Capital Economics analyst Mark Williams.
"The PBoC could have achieved the same end of loosening constraints on credit growth quietly through its open market operations.
"The fact that it chose to act in this more public way is a signal not only that policymakers are loosening but that they want to be seen to be doing so," he added.
China, anxious about rising living costs, has pulled on a variety of levers to curb price rises in the past 18 months, including restricting the amount of money banks can lend and hiking interest rates.
ETX Capital trader Manoj Ladwa said China's move was "a short-term positive certainly for equity markets -- but much depends on eurozone ministers being able to sort out their issues."
European equities had fallen in earlier deals as eurozone finance chiefs struggled to boost the firepower of a bailout fund for indebted members at a key gathering in Brussels on Tuesday.
While they were unable to increase the European Financial Stability Facility, they did give it new powers and called on help from the International Monetary Fund (IMF).
"Finance ministers convened again in Brussels for another jolly discussion about the euro and what not to do about the crisis of confidence in government debt," said Mark Deans, dealing manager at currency specialists MoneyCorp.
"Presumably they went there in the expectation of making progress. In fact all they managed to do was water down the EFSF.
"A figure of 1.0 trillion euro was originally attached to the fund; after yesterday's meeting investors were left in no doubt that the eventual number will be significantly lower."
Asian equities mostly slipped on Wednesday, after two days of gains, as the eurozone drama continued to dominate sentiment.
Markets were also hit by news that India's economic growth slowed to 6.9 percent year-on-year in the last quarter, its lowest in over two years, hit by a string of rate hikes and a weakening global economy.
Wall Street finished in positive territory overnight, aided by solid US consumer data, but sentiment was hampered as American Airlines filed for Chapter 11 bankruptcy protection.
Eurozone finance chiefs turned to the IMF for more help to keep the eurozone together on Wednesday after missing their goal of boosting the EFSF bailout fund from the current level of 440 billion euros.
With fears rising that Italy will need a bailout after its borrowing costs soared to record heights, ministers were searching for ways to control the rapidly worsening crisis now threatening the entire world financial system.
On Tuesday, Italy encountered serious strains at a bond auction which resulted in an inversion of the curve of interest rates demanded to finance Italian public finances, with the rate for three-year money being higher than the rate for 10 years.
Meanwhile in Britain on Wednesday, more than two million public sector workers are holding the biggest strike in decades to protest at government's plans to change their pensions.