By Richard Hubbard
LONDON (Reuters) - European shares, oil and the euro edged higher on Thursday but uncertainty over the outcome of a keenly-watched European Central Bank meeting kept a lid on the gains.
The U.S. Federal Reserve stopped short of signaling fresh stimulus for the economy at a meeting on Wednesday, but some investors believe the ECB will deliver on promises to support the euro at its policy meeting later in the day.
Reuters reported on Monday that the main idea under consideration is re-activating the ECB's bond-buying program for Spain and Italy in tandem with the euro zone's rescue funds, but that action could be at least five weeks away.
However, the absence of any sign that Germany has relented in its opposition to the ECB taking a more interventionist role in the debt market - seen by many economists as the only way to quell the euro zone's crisis - has kept the outcome in doubt.
"Warnings by the Bundesbank President (Jens) Weidmann for the ECB to not to overstep its remit sets the scene for a stressful policy meeting today," Mitul Kotecha, Head of Global FX Strategy for Credit Agricole CIB.
RAISED HOPES
ECB President Mario Draghi raised market expectations for action by the central bank last week when he promised to do all that was necessary to preserve the euro within his mandate to set monetary policy across the 17-member currency bloc.
Since his statement European shares have rallied by up to 5 percent and the euro has risen about a cent against the dollar, while yields on Italian and Spanish debt have fallen sharply.
"If they (the ECB) simply say we are going to buy bonds then initially the market will probably react positively," said Elwin de Groot, senior market economist at Rabobank.
"I am inclined to say that if it stays with only promises we could still see a negative market reaction, albeit perhaps more limited," de Groot added.
Ahead of the meeting the single currency was trading about 0.25 percent higher against the dollar at $1.2255, but remained well below Wednesday's high of $1.2337.
The FTSEurofirst 300 index <.FTEU3> of top European stocks and the blue chip Euro STOXX 50 index <.STOXX50E> index were both little changed while Brent crude oil was steady near $106 a barrel.
Ten-year Spanish bond yields were up 2.1 basis points at 6.76 percent while the five-year yields gained 9.2 bps to 6.27 percent.
Yields rose at a Spanish bond auction of two- to 10-year debt just before the ECB meeting. The 2022 bond yielded an average of 6.647, up from 6.430 at the last auction.
The Bank of England will also reveal its latest policy decision on Thursday but no changes are expected to its easing.
The likelihood of a lack of action by the BoE and the possibility of a decisive move by the ECB lifted the euro to its highest level in three weeks against sterling on Thursday. The euro rose to 78.95 pence, its strongest since July 13.
On Wednesday, U.S. stocks and Treasuries fell while the dollar rallied against the euro and yen after the Fed offered no new monetary stimulus at the end of a two-day policy meeting but said it would act if economic conditions worsened.
($1 = 0.8132 euros)
(Additional reporting by Ana Nicolaci da Costa; Editing by Peter Graff)
