Spanish cuts, German growth boost stocks

European shares climbed close to 1 percent and the euro strengthened on Wednesday on evidence of continued German growth and Spain's plans to cut its deficit.

Wall Street also looked set to open higher as investors continued to adjust their positions following the European Union's sovereign debt rescue plan.

MSCI's all-country world stock index was up 0.3 percent, led by Europe, where the FTSEurofirst 300 gained 0.1 percent gain after starting slightly lower.

World shares gained nearly 5 percent on Monday after the EU and the International Monetary Fund agreed a 750 billion euro rescue package to stop Greece's debt crisis spilling over into other economies. Markets slipped back a bit on Tuesday.

The plan has drawn a line under the worst fears about a spread of the euro zone debt crisis, leaving investors to look at what countries are doing to improve their finances.

"(It) is likely to shift markets' attention to the actual implementation of the promised fiscal reforms and economic performance in response to them" Barclays Capital said in a note.

"If these disappoint, the very positive market reaction of recent days may not last."

Spanish Prime Minister Jose Luis Rodriguez Zapatero on Wednesday announced public spending cuts of 6 billion euros and said civil servant wages would be slashed by 5 percent this year as part of a drive to meet EU deficit targets.

The measures are designed to bring the country's budget deficit to 6 percent of gross domestic product in 2011 from 11.2 percent in 2009.

EURO FIRMS

The euro climbed 0.3 percent against the dollar to $1.2688.

Earlier the currency had weakened with some investors concerned that the EU rescue plan does not solve the fundamental issues facing the bloc's finances.

On fixed income markets, the premium investors demand to hold 10-year Greek government bonds rather than euro zone benchmark German Bunds fell.

The 10-year Greek/German government bond yield spread narrowed to 465 basis points.

Germany's GDP grew for the fourth quarter in a row in the first three months of 2010, data showed on Wednesday.

"We have heard of more central bank buying of debt, in accordance with the European rescue deal struck (at the weekend) to help peripheral issues" a trader in London said.

On Monday, Greek/German bond yield spreads shrank from more than 1,000 bps to around 500 bps.