Euro, stocks up ahead of Italian debt sale

LONDON (Reuters) - European shares and the single currency rose on Friday after positive comments on the region's outlook from the European Central Bank and the success of Spain's bond auction, with attention focused on Italy's first debt sale of the year.

"The euro has risen after (Thursday's) auctions were much better than expected but it's only a correction so far and there's no serious fresh buying," said Manuel Oliveri, currency strategist at UBS in Zurich.

Italy sells three-year bonds along with 2018 paper, and a good result could lead to further tightening in the difference between the rates it pays compared to German government bonds, a key measure of investor confidence.

Italy's 10-year government bond was yielding around 6.5 percent on Friday compared to levels of around 7.0 percent before the Spanish debt auction.

The euro rose 0.4 percent to $1.2859, having climbed to as high as $1.2879 in Asian trading, and pulling further away from a 16-month low near $1.2662 hit earlier in the week.

The FTSEurofirst 300 <.FTEU3> index of top European shares was up 0.7 percent at 1,025.75 points. It reached a five-month high of 1,031.08 on Thursday before closing 0.3 percent lower.

Banks were the main gainers early on, with the STOXX Europe 600 Bank index <.SX7P> up 1.6 percent.

ECB SOOTHES FEARS

On Thursday the ECB left official interest rates unchanged and did not offer to take any further action to tackle the euro-zone's debt crisis, claiming there were tentative signs the economy was stabilizing.

The bank said its flood of cheap three-year loans is helping banks and supporting morale across the euro zone, but left the door open to further interest rates cuts.

The outcome came as little surprise to investors given the slightly firmer tone of some of the recent data and recent back-to-back rate cuts.

Earlier, in a closely watched test of investor confidence, Spain had sold double the targeted amount at its first bond auction of 2012, while yields halved at an Italian T-bill sale.

Italy -like Spain, a focal point for investor anxiety about the euro zone - will hope to match the success of Thursday's Spanish auction when it sells up to 4.75 billion euros of bonds on Friday. The sale marks its first step in a challenging campaign of issuance for 2012.

Hopes have also grown that Greece could reach a bond swap deal with private creditors to reduce its debt load by the end of next week, with a formal offer possible by early February, a finance ministry source said told Reuters on Thursday.

The chief executive of French bank Societe Generale told newspaper Les Echos the deal, which could see creditors voluntarily write down at least half the value of their Greek sovereign bonds, has a good chance of happening in the coming days.

However, "an agreement on the Greek debt swap is unlikely to be enough to bring Greece back to a sustainable path," said Oliveri at UBS.

On the data front, the UK releases Producer Prices numbers for December which are expected to show both input and output price inflation fell quite sharply, which should put downward pressure on an annual inflation rate currently around 5 percent.

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Asset performance in 2012: http://link.reuters.com/nyw85s

ECB bank borrowing, deposits: http://link.reuters.com/nyd85s

ECB in graphics: http://link.reuters.com/neg32s

Europe earnings expectations: http://link.reuters.com/duc95s

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(Additional reporting by Neal Armstrong; Editing by Catherine Evans)