European stocks and the euro rallied on Thursday after France and Germany issued a joint defence of Greece, saying its place was in the eurozone despite market sentiment it might default.
But official EU data forecasting eurozone growth of 1.6 percent this year, also pointed to a deterioration and slowdown in the second half of the year.
Despite the much needed vote of confidence and talk of an EU deal on tighter budget discipline seen as vital to prevent future debt crises, many still expect Greece to default on its debt, risking its exit from the single currency.
German Chancellor Angela Merkel and French President Nicolas Sarkozy said on Wednesday they were convinced that Greece's future lay within the eurozone, after holding a conference call with Greek Prime Minister George Papandreou.
Athens meanwhile vowed to stick to the harsh austerity measures needed for an EU bailout.
"Sentiment has improved tangibly following Merkel and Sarkozy's reassurances yesterday evening," said Jane Foley, senior currency analyst at Rabobank in London.
"Merkel has clearly had some success this week in downplaying some of the more damaging remarks from German government officials particularly with respect to the prospects of a Greek default.
"That said it seems that the eurozone debt crisis is no nearer a solution than it was last week and consequently, despite today's better tone, it is fair to expect the market to remain in a very jittery mood."
In early stock market trade, London's FTSE 100 index jumped 1.72 percent to 5,318.39 points, Frankfurt's DAX 30 rallied 2.04 percent to 5,446.93 points and in Paris the CAC 40 gained 1.74 percent to 2,997.84.
Madrid surged 2.11 percent and Milan won 1.40 percent.
The euro meanwhile rose to $1.3780 from $1.3750 late in New York on Wednesday.
"A degree of optimism has emerged (on stock markets) after Merkel and Sarkozy said they are convinced Greece will meet its deficit cutting targets in order to receive the next tranche of the bailout," said Spreadex trader Jordan Lambert.
Greece has been warned that failure to overhaul its economy could cost vital funds out of the 110-billion-euro ($150-billion) EU-IMF bailout that rescued it from bankruptcy last year.
International auditors are set to return to Greece. If they decide not to unlock the next eight-billion-euro tranche in rescue loans, Athens would run out of cash next month.
A new 159-billion-euro lifeline also hangs in the balance, with some eurozone members increasingly frustrated at Athens' delay in enacting agreed reforms.
According to sources on Thursday, the European Parliament and EU states have reached agreement in principle to tighten the European Union's budget rules.
"There is an agreement in principle" on a set of legislative proposals known as the "six-pack", a parliament sources told AFP, adding that the deal would be presented to EU finance ministers meeting in Poland on Friday.
Stock markets closed higher in Asia on Thursday, with Tokyo gaining 1.75 percent and Sydney gaining 1.65 percent.
Wall Street also rallied overnight, with the Dow Jones Industrial Average jumping 1.27 percent and the broader S&P 500 up 1.35 percent.
European stocks had won support on Wednesday after European Commission head Jose Manuel Barroso said the commission would shortly present its ideas on the introduction of mutualised "eurobonds", which would see all eurozone states guarantee each others' government borrowings.
Attention on Thursday was also on Europe's banks. In Zurich, UBS shares plunged after the Swiss banking giant said it had uncovered unauthorised trading that had generated an estimated loss of $2.0 billion.
The bank's stocks plummeted 7.04 percent to 10.16 francs, sharply underperforming the Swiss Market Index which was down 0.02 percent.
In Paris, Societe Generale was down 1.27 percent at 17.16 euros, a day after suffering bigger losses when Moody's downgraded the bank's credit rating on concerns over its exposure to Greece.
"The near term mood of the market will undoubtedly be dictated by the outcomes of continuing talks between key European ministers over stabilising Greece and key European banks," said Cameron Peacock, an analyst at traders IG Markets.