European and U.S. stock markets recovered Thursday though the euro remained under pressure as traders and investors continue to fret about what the new year will hold in store for the currency amid ongoing worries over the debt levels of a number of countries, notably Italy.

In a sign that nerves remain as the trading year comes to a close, the euro fell to $1.2866, its lowest level since Sept. 2010, before recovering to trade above $1.29. Against the yen, it had fallen to a ten-year low of 100.06 yen, before clambering up to 100.45 yen.

"The euro is lower as today's Italian debt auctioned contained both positive and negative elements, keeping market participants cautious ab0ut prospects for European debt markets and the euro," said Nick Bennenbroek, an analyst at Wells Fargo Bank.

Though the euro was on the retreat, stocks managed to eke out some solid gains, especially after Wall Street bounced back following some upbeat U.S. economic data _ the government reported that the number of claims for unemployment benefits remained below 400,000 and at a level consistent with modest job growth while the National Association of Realtors said its index of sales agreements jumped 7.3 percent last month.

In Europe, the FTSE 100 index of leading British shares closed up 1.1 percent at 5,566.77 while the CAC-40 in France rose 1.8 percent to 3,127.56. Germany's DAX ended 1.3 percent higher at 5,848.78.

In the U.S., the Dow Jones industrial average was up 0.8 percent at 12,243 while the broader S&P 500 index rose 0.7 percent at 1,259.

Though a strong run of U.S. economic data has helped shore up stock markets over the past couple of weeks, fears of a deterioration in Europe's debt crisis is never far from traders' minds.

Another money-raising exercise from Italy's monetary authorities did little to shore up stocks or the euro, even though borrowing rates fell for the second day running. Though Italy raised around euro7 billion ($9.2 billion) in the four auctions, it was less than the euro8.5 billion ($11 billion) potentially on offer.

In the most keenly-awaited auction, the Bank of Italy reported that Italy raised euro2.5 billion ($3.3 billion) of ten-year bonds at an average yield of 6.98 percent. That's lower than the 7.56 percent it had to pay at an equivalent auction last month, when investor concerns over the ability of the country to service its massive debts became particularly acute and effectively prompted a change in government.

Italy's borrowing rate on the key 10-year bond remains uncomfortably close to the 7 percent level widely considered to be unsustainable in the long run. Greece, Ireland and Portugal all had to request financial bailouts after their 10-year bond yields pushed above 7 percent. In the secondary markets, the ten-year yield continues to hover around the 7 percent mark.

Markets had grown fearful over the past few months that Italy will find it difficult to pay off its massive debts, which stand at around euro1.9 trillion ($2.5 trillion). Next year alone, Italy has some euro330 billion ($431 billion) of debt to refinance.

In another sign of unease, banks continued to park large amounts of money overnight at the European Central Bank, reflecting strains in the interbank lending market and a massive euro489 billion infusion of cheap, long-term central bank credit into the banking system last week. The amount deposited overnight Wednesday was an elevated euro436.58 billion ($570.78 billion), down from a record euro452.03 billion from Tuesday.

The large deposits suggest banks are temporarily holding some of their borrowings from last week there. It also suggests that banks are afraid to lend to each other on the interbank market, preferring to hold cash risk-free at the ECB even at low interest rates.

The large ECB loans were aimed at steadying the banking system during Europe's government debt crisis. Many banks are having trouble raising money elsewhere because of fears that they may suffer losses on government bonds issued by heavily indebted governments.

Earlier in Asia, however, investors booked losses amid light trading. Japan's Nikkei 225 index fell 0.3 percent to close at 8,398.89. Hong Kong's Hang Seng Index closed 0.7 percent lower at 18,397.92.

Oil prices fell after the U.S. government reported that crude supplies grew unexpectedly last week. Benchmark crude fell by 73 cents Thursday to $98.63 per barrel in New York.

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AP Business Writer Pamela Sampson in Bangkok contributed to this article.