European stocks rose on Wednesday, halting a three-day drop, after European Central Bank policymaker Ewald Nowotny raised the prospect of steps that could boost the firepower of the euro zone's new bailout fund.
Nowotny said there are arguments for giving Europe's permanent rescue fund a banking licence, an idea that the ECB has rejected so far, sparking a rebound in the euro currency as well as in battered Spanish and Italian shares, which had plummeted about 10 percent in three sessions.
France has been behind a push to give Europe's ESM bailout fund a banking licence so it can tap cheap ECB funding and increase its firepower. The ECB has repeatedly rejected the idea, arguing it would be thinly disguised monetary financing of governments.
At 0840 GMT, the FTSEurofirst 300 index of top European shares was up 0.2 percent at 1,019.96 points, reversing early losses, while the euro zone's blue chip Euro STOXX 50 index was up 0.7 percent at 2,165.77 points.
Spain's IBEX was up 1.8 percent and Italy's FTSE MIB 1.5 percent following sharp losses in the last few sessions. Banco Santander rose 2.4 percent and UniCredit added 3.4 percent.
Barclays France director Franklin Pichard warned the rebound might be short-lived, pointing to a steady flow of negative news from European economies and the countries struggling most in the debt crisis.
Germany's closely-watched Ifo index of sentiment came in below forecasts on Wednesday while Britain's second quarter numbers were far worse than expected.
"The slowdown in the global economic growth remains moderate but it has started to drag companies' results and outlooks, which had been quite resilient so far," he said.
"Overall, Spain remains the big focus, with no EU summit expected during the summer, and as recent signals from the Spanish government is nothing to reassure."
Intensifying worries over Spain's ability to reduce its deficit and fix its economy have prompted investors to drop risky assets such as equities. Soaring borrowing costs and high regional debts have fuelled expectations that Madrid will soon need a full bailout.
Deutsche Bank bucked the trend in the banking sector on Wednesday, dropping 3.3 percent after issuing a profit warning which fuelled worries the German lender may have to raise capital.
Its European peers are set to report results in the next few weeks and are expected to post grim investment banking earnings and also the impact of a worsening economic backdrop for retail operations.
Germany's Daimler was up 3.6 percent, after the company stuck to its forecast for roughly flat underlying profits this year, while posting a smaller-than-expected decline in quarterly results.
Despite Wednesday's gains, the Euro STOXX 50 index remains below the key 50 percent retracement of its rally from late May to last week, and chartists said the trend remains negative.
"Apart from the DAX, all the main European indexes have broken their strong trendlines initiated with 2012 lows, so this pull-back will go on and the next target is the lines formed by 2011 and 2012 lows, which represents a downside potential of 3 to 4 percent," Aurel BGC chartist Gerard Sagnier said.
The Euro STOXX 50 will find strong support on the trendline formed by 2011 and 2012 lows, or at around 2,080 points.