Europe's main stock markets rallied Wednesday as falling eurozone inflation stoked hopes of quantitative easing stimulus from the European Central Bank, dealers said.
However, at the same time, the data also sent the European single currency plunging to a fresh nine-year low at $1.1802.
London's benchmark FTSE 100 index rallied to close up 0.84 percent at 6,419.83 points.
Frankfurt's DAX 30 won 0.51 percent to 9,518.18 points and the CAC 40 in Paris rose 0.72 percent to 4,112.73.
Eurozone consumer price inflation dropped to -0.2 percent in December, entering negative territory for the first time since the financial crisis in October 2009 and raising fears of deflation, EU data showed.
The drop, brought on by plummeting oil prices, heaps pressure on the ECB to take bold action to stimulate price rises in the 19-nation currency zone.
- 'Fire up the printing press' -
"(ECB chief) Mario Draghi will find it very difficult to deny" that deflation is negatively affecting the eurozone "and this could force him to fire up the printing press," said IG analyst David Madden.
"Traders still can't shake the looming political uncertainty in Greece but for now they are content to ride the QE gravy train," he added.
Markets fell sharply on Monday on fears Greece could exit the euro if a left-wing party wins the January 25 election and reverses the economic policy mandated as part of the country's 240-billion-euro bailout.
A quantitative easing programme is considered by many economists to be tantamount to printing money as the central bank creates money to buy government and corporate debt, thus freeing up funds that stimulate economic activity and weaken the currency.
ETX Capital analyst Daniel Sugarman told AFP however: "Markets are up... not because of any certainty that QE will work, but because there’s a strong sense that the ECB should be pursuing all measures to combat the apparently resurgent crisis, and it seems more likely that the central bank will now be forced to do so."
It is the first concrete sign of much-feared deflation, or long-term falling prices, in the eurozone. Deflation is officially defined by prices falling over a prolonged period.
Equity market gains were however capped as oil prices plunged to fresh 5.5-year lows on Wednesday, with the price of Brent crude dipping below $50 per barrel briefly, weighed down by plentiful crude supplies, demand worries and the strong dollar.
In foreign exchange activity, the European single currency dived to $1.1802 -- the lowest level since the beginning of January 2006. It later stood at $1.1815.
The euro had already touched a nine-year nadir in Asian trading hours on Wednesday on lingering worries of a Greek exit from the eurozone.
- Euro-dollar parity? -
"There's nothing standing in the way of the nose-diving euro, now that the eurozone has fallen into deflation," Razaqzada told AFP.
"It could reach $1.15 against the dollar soon, but could even hit parity later in the year."
He added: "QE is bad for the euro because it will effectively push interest rates below zero. Yield-seeking investors are thus expected to swap their euros for currencies where the central bank is in a hawkish mode, such as the US and New Zealand dollars."
Elsewhere on Wednesday, Greece's borrowing rate soared above the symbolic level of 10 percent on Wednesday, as investors shunned the bond over fears that the country could leave the eurozone if an anti-austerity candidate wins January 25 elections.
Greek 10-year bonds were fetching yields of 10.676 percent on the secondary market at Wednesday's close, up from 9.746 percent on Tuesday.
Short-term borrowing rates also rose slightly, with Greece paying 2.30 percent in new six-month bond issues on Wednesday compared with 2.15 percent in December.
The main stock market in Athens fell 1.46 percent to 777.70 points.
Wall Street jumped on solid US economic data.
The Dow Jones Industrial Average rose 0.96 to stand at 17,538.73 points in midday trade.
The broad-based S&P 500 gained 1.19 percent to 2,026.38, while the tech-rich Nasdaq Composite Index added 1.09 percent to 4,642.79.
Gulf stocks mostly rebounded despite oil prices sliding further as investors snapped up bargains. Dubai rose 4.4 percent, Abu Dhabi added 2.4 percent, the Saudi Tadawul All-Shares Index rose 0.94 percent, Qatar climbed 0.73 percent and Kuwait added 0.4 percent.
Oman dropped 0.41 percent and Bahrain 0.09 percent.
Shares in Asia staged a tepid recovery Wednesday.
Tokyo and Seoul were flat, while Shanghai added 0.67 percent and Hong Kong rose 0.83 percent. Sydney bucked the trend, sliding 0.21 percent.