The euro rose from a one-month low versus the dollar on Thursday and top-rated government debt fell while world stocks held above a three-week trough on hopes that new governments being formed in Italy and Greece could help fend off a euro zone break up.
Italy, which has overtaken Greece as the main focus of investor concern, was forced to pay a 6.087 percent yield, the highest in 14 years, at a one-year debt auction on Thursday to place the full planned amount of 5 billion euros ($6.8 billion).
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The euro zone's two-year-old crisis is escalating rapidly because the bloc can't afford to bail out Italy. EU officials told Reuters that French and German officials had held talks on splitting the zone.
Former European Commissioner Mario Monti emerged on Thursday as favourite to replace Silvio Berlusconi and form a new government to stave off a run on Italian bonds.
Greek bank stocks rallied more than 8 percent on expectations former European Central Bank Vice President Lucas Papademos may be appointed as head of a new coalition government.
Investors hope new governments can quickly set out, and enact, austerity measures.
"The fundamentals are out of the window now. It's all politics. Austerity measures would help in the long term, but not in the short term, because austerity means your economy shrinks. You can't have pain-free austerity," said Andy Lynch, fund manager at Schroders.
MSCI world equity index was down 0.7 percent, having hit its lowest since October 21 earlier. The index is down nearly 10 percent since January.
European stocks were steady while emerging stocks were down 2.7 percent.
Earlier, poor corporate results from the financial and industrial sectors also weighed on investor risk tolerance.
Third-quarter net profit of France's third-biggest listed bank, Credit Agricole slumped by 65 percent on the back of Greek sovereign debt losses.
Germany's Siemens, a bellwether for the euro zone's largest economy, proposed a smaller-than-expected 11 percent increase in its full-year dividend after its quarterly operating profit fell short of expectations.
Brent crude oil rose 0.6 percent to $112.92 a barrel.
MORE ITALY DEBT TEST
Bund futures erased earlier gains to fall 43 ticks. The premium investors demand in holding 10-year Italian government bonds rather than German counterparts fell after hitting a record 576 basis points earlier.
Italy faces another test of investor appetite for its debt when it auctions up to 3 billion euros of five-year government bonds next week.
The dollar lost a quarter percent against a basket of major currencies.
The euro rose 0.3 percent to $1.3590, having hit a one-month low around $1.3480 earlier.
"We think the fair value for the euro is at $1.35-1.36 and think these levels will be sticky given how heavy positioning is against the euro," said Ankita Dudani, G10 currency strategist at RBS Global Banking.
"We are bearish on the euro zone, but we do see steady support for the euro from the Middle East and Asian sovereign investors."
The shared currency suffered its sharpest daily fall in 15 months on Wednesday after yields on 10-year Italian bonds spiked above 7 percent, a level where the cost of financing a debt burden of more than 2 trillion euros is seen as unsustainable.