Stocks rose sharply Thursday as the Greek prime minister bowed to massive political pressure to scrap a referendum on a European bailout plan. A surprise rate cut from the European Central Bank also helped boost sentiment following days of turmoil in financial markets.
However, the main focus centered on Athens where Greek Prime Minister George Papandreou faced intense pressure to resign and let a coalition government approve a European bailout plan instead of holding a risky referendum on it.
Papandreou has withstood the pressure to stand down and now says he is seeking emergency talks with the opposition, in the apparent hope of forging a national unity government. Papandreou made the comments in an emergency Cabinet meeting Thursday. His office released his speech to the ministers.
Papandreou's unexpected announcement Monday that he intended to put the hard-fought bailout package to a referendum horrified Greece's international partners and creditors, triggering turmoil in financial markets as investors fretted over the prospect of a disorderly default and the country's exit from the 17-nation eurozone.
"With a sharply diminished majority and defections from his party almost daily perhaps the Greek leader realized before anyone else that his way forward is blocked at every turn," said Andrew Wilkinson, an analyst at Miller Tabak & Co.
"His only way to stop political bickering and back stabbing is to throw fuel on the fire, creating sufficient illumination for politicians and people to see clearly enough that there is only one path ahead," he added.
News that the vote has been scrapped helped ease those concerns.
In Europe, Britain's FTSE 100 closed up 1.2 percent at 5,545. France's CAC-40 rose 2.7 percent 3,195 while Germany's DAX was up 2.8 percent at 6,133.
In the U.S., the Dow Jones industrial average rose 1.2 percent, to 11,974 while the broader S&P 500 index rose 1 percent to 1,251.
Despite Thursday's recovery, markets remain jittery about how Europe will resolve its debt crisis, especially now that it's been openly admitted that a country can actually leave the euro.
This week's instability in Greece has sent immediate ripples throughout Europe. Premier Silvio Berlusconi's government in Italy was teetering as well after it failed to come up with a credible plan to deal with its dangerously high debts, and Portugal demanded more flexible terms for its own bailout.
Markets were thrown into turmoil on Monday after Papandreou's referendum proposal. It horrified Greece's international partners and creditors, triggering market worries that Greece may default on its debts and exit the eurozone.
This week's turmoil was also a clear factor in the European Central Bank's surprise decision Thursday to cut interest rates by a quarter of a percentage point to 1.25 percent. That helped shore up stock markets too.
The move, which comes earlier than expected by many economists, takes the bank's benchmark rate to 1.25 percent.
European growth is expected to slow to near or below zero in the last three months of the year.
Uncertainty from Europe's debt crisis is a factor. Business and consumers are reluctant to spend and investors because they fear more financial turmoil if Greece defaults on its debts.
The euro suffered a bout of selling after ECB president Mario Draghi signaled that the ECB's bond purchases, which have been keeping down borrowing rates for financially weak countries like Italy, are temporary and limited.
However, the retreat was short-lived as investors breathed a sigh of relief over the apparent scrapping of the referendum pledge. The euro was up 0.28 percent at $1.3787.
Though Greece's political developments were the main point of interest in the markets, investors are keeping a close watch on the French resort of Cannes where the Group of 20 leaders from the industrial and developing world are meeting.
In Cannes, President Barack Obama pledged world leaders would flesh out details of a plan to resolve the European financial crisis.
Earlier in Asia, Hong Kong's Hang Seng retreated 2.5 percent to close at 19,242.50. South Korea's Kospi lost 1.5 percent to 1,869.96 and Australia's S&P/ASX 200 shed 0.3 percent to 4,171.80.
Japanese markets were closed for a national holiday. Mainland Chinese shares rose, with the benchmark Shanghai Composite Index gaining 0.2 percent to 2,508.09.
Benchmark crude for December delivery was up $1.46 at $93.97 a barrel in electronic trading on the New York Mercantile Exchange.
Pam Sampson contributed from Bangkok.