Hopes that the Federal Reserve could provide new economic stimulus gave stocks a much-needed boost Wednesday, a day after markets were shaken by fears Europe's debt crisis was spreading to large economies like Italy.
Fed Chairman Ben Bernanke said the U.S. central bank is prepared to provide additional stimulus if the current economic lull persists. Delivering a report to Congress, he indicated that monetary policy was likely to remain loose for the foreseeable future as labor market improvements remain weak.
While his comments were not a promise for more economic stimulus, investors were encouraged by the notion the Fed would not let the world's biggest economy slow down too quickly without offering more support.
That helped market sentiment, which had earlier been supported by data out of China showing its economy grew by 9.5 percent in the April-June quarter. Although that is lower than the previous quarter's 9.7 percent growth rate, it alleviates concerns of an abrupt slowdown and gives Beijing room to tighten controls to fight inflation.
The Chinese government has been trying to tame its economy _ the world's second-largest _ where inflation hit a three-year high in June. Beijing has hiked interest rates five times since October and tightened controls on lending and investment.
"Today's data should dampen fears that the economy is heading into a hard landing," said Mark Williams, senior China economist at Capital Economics.
The news helped soothe investors' nerves after days of volatile trading, particularly in Europe, where fears grew that the debt crisis would infect core countries such as Italy, the eurozone's third-largest economy.
Investors were spooked by EU governments' failure to agree on a second rescue package for Greece and their insistence on getting banks to contribute to bailouts, even at the cost of a debt default.
The uncertainty left markets fearing the worst _ stocks, bonds and the euro plummeted. Italian bond markets seized up and its main stock index swung wildly. Prices stabilized only after the Italian government said it would accelerate approval of its austerity plan and increase its size.
Bolstered by the news, markets brushed off a downgrade of Ireland's bonds to junk status by ratings agency Moody's on Tuesday. The agency said it sees a growing risk the country will need a second bailout once its current rescue package expires at the end of 2013.
Analysts said the report was not a shock after Moody's had downgraded Portugal a week earlier for much the same reasons.
The recovery was strongest in Milan, where the main index rallied to close 1.8 percent higher and Italy's bond yields edged down further. Britain's FTSE 100 rose 0.6 percent to 5,906.43, while Germany's DAX gained 1.3 percent to 7,267.87 and France's CAC closed up 0.5 percent at 3,793.27.
Shares in British Sky Broadcasting closed 2 percent higher in London after News Corp. pulled its takeover bid for the company in the face of vociferous opposition in the U.K. parliament. The stock initially slumped on the announcement but then recovered as longer-term investors bought into what had become a relatively cheap stock.
In the U.S., Wall Street advanced, with the Dow Jones up 1.2 percent to 12,595.26 while the S&P 1.2 percent higher at 1,329.83.
The euro rallied 1.4 percent to $1.4177 by late afternoon in Europe, while the dollar was down 0.5 percent at 78.96 yen.
In Asia, indexes mostly closed higher thanks to the strong Chinese growth data.
Hong Kong's Hang Seng index added 1.2 percent to 21,926.88, the Shanghai Composite index rose 0.5 percent to 2,768.21, and South Korea's Kospi gained 0.9 percent at 2,129.64.
Japan's Nikkei 225 stock average finished up 0.4 percent at 9,963.14 after the yen pulled back from its highest level against the U.S. dollar since mid-March earlier in the day.
After the dollar fell under the 79-yen level, Japanese Finance Minister Yoshihiko Noda described the move as "slightly one-sided." His comment triggered speculation that Japan might intervene in currency markets.
Australia's S&P/ASX 200 rose 0.4 percent to 4,514.80, while New Zealand's benchmark slipped 0.2 percent to 3,424.35.
Oil prices rose above $98 a barrel after a report showed U.S. crude supplies unexpectedly rose last week, suggesting demand is weak.
Benchmark oil for August delivery was up $1.05 to $98.48 a barrel in electronic trading on the New York Mercantile Exchange. Crude gained $2.28 to settle at $97.43 on Tuesday.
Tomoko A. Hosaka in Tokyo contributed to this report.