European shares rally, euro slides on ECB stimulus bet

LONDON (Reuters) - European stocks rallied and the euro fell to a near one-year trough against the dollar on Monday as investors saw rising chances of further policy easing by the European Central Bank.

ECB President Mario Draghi said late on Friday that the bank was prepared to respond with all its available tools should inflation in the euro zone drop further.

Investors speculated this meant the ECB was more likely to embark on an asset purchase program, or quantitative easing, or adopt other stimulus measures in coming months.

Draghi's comments sent some euro zone government bonds to new record lows while European stock markets rose, overshadowing news of the resignation of the French government and a weak German Ifo business sentiment survey.

"The key message is that Draghi stands ready for more action if needed," Franz Wenzel, chief strategist at AXA Investment Managers in Paris, said.

"Whether they're going to do quantitative easing remains to be seen but we're fairly confident that the financial engineers at the ECB will find other tools. At this juncture, we don't exclude quantitative easing at the end of this year."

Yields on German , Spanish , Italian and Portuguese 10-year bonds all hit new record lows.

The euro skidded to $1.3185 in early Asian trade, its lowest since September 2013, from around $1.3246 late in New York on Friday. It was last trading at $1.3204, down about 0.3 percent on the day, amid lower than usual volumes due to a holiday in London.

A weak German business sentiment index, Ifo, also weighed on the single currency in European trade, as it reinforced concerns about Germany, the euro zone's biggest economy.

The euro zone's blue-chip Euro STOXX 50 index <.STOXX50E>, however, was up 1.1 percent and U.S. futures pointed to a higher start on Wall Street .

Both Germany's DAX <.GDAXI> and France's CAC 40 <.FCHI> gained 1.2 percent.

French Prime Minister Manuel Valls presented his government's resignation on Monday, a day after Economy Minister Arnaud Montebourg called for new economic policies, and questioned neighbor Germany's "obsession" with budgetary rigor.

Some investors said that a stronger and more unified French government might emerge, more committed to President Francois Hollander's deficit-cutting measures that have been aimed at strengthening the French economy.

"The new government should be more unified. Hollande has shown he will not change course," said Francois Savary, chief investment officer at Swiss bank Reyl.

US RATES SEEN RISING EARLIER

In contrast to the ECB, U.S. Federal Reserve Chair Janet Yellen on Friday gave a nod to some Fed officials' concerns about the sustained level of monetary policy stimulus, even as she stressed the need to move cautiously on raising rates.

As a result, Fed funds futures fell back <0#FF:> as the market priced in the risk of an earlier rise in interest rates, while the dollar index <.DXY> rose to 82.563, its highest since September last year.

In commodities markets, the rising dollar pressured prices with spot gold down 0.2 percent to $1,276.94.

Brent crude edged higher above $102 a barrel on Monday with support from geopolitical tensions in Ukraine and Libya, although ample supply limited the rebound from last week's 14-month low.

(Additional reporting by Anirban Nag and Marius Zaharia in London; Wayne Cole in Sydney; Editing by Susan Fenton)

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