By Carolyn Cohn
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Greece's prime minister George Papandreou won the backing of his cabinet on Wednesday to hold a referendum on a 130 billion euro bailout package, a decision that had sent markets into a tailspin in the previous sessions.
Papandreou will later face the leaders of France and Germany, who summoned him for crisis talks in Cannes, before a G20 summit of major world economies, to push for quick implementation of the bailout deal.
Rejection of the package could lead to a disorderly default for Greece with knock-on effects for European banks which hold Greek debt, a prospect which sliced more than 6 percent from the MSCI world equity index in the space of two days this week.
The referendum news wiped out all the gains made after euro zone leaders last week agreed a deal to help indebted peripheral nations.
"The fears about the fate of the banking system remain high, as Greece's membership to the European Union is in the balance. Without the bailout plan, the country will go bankrupt," Sebastien Barthelemi, analyst at Louis Capital Markets in Paris, said.
But European stocks opened higher as markets paused for breath, hoping G20 leaders will sort out the mess.
Investors are also looking for signs of a kick-start to sluggish global growth.
The U.S. Federal Open Market Committee, which concludes its two-day policy meeting later on Wednesday, could begin to prepare financial markets for further monetary easing, even if it refrains from any new stimulus just yet.
European stocks rose more than 1 percent and world stocks gained 0.45 percent, with riskier emerging markets putting on 0.77 percent.
The euro rallied 0.6 percent to $1.3780, picking up from Tuesday's three-week lows. The single currency had suffered its biggest two-day fall since May this week on uncertainty about the euro zone debt deal.
The dollar fell 0.44 percent against a basket of currencies and 0.3 percent against the yen to just above 78.
Japan sold a record of nearly $100 billion worth of yen on Monday, driving the greenback from a record low of around 75.31 yen to a high of 79.55 yen.
"The FX market is not at the moment prepared to challenge the Japanese authorities and push dollar/yen back below 78, but at this point the MOF (Ministry of Finance) doesn't seem keen to force dollar/yen higher either," said Kit Juckes, a strategist at Societe Generale.
Brent crude oil rose 0.69 percent to $110.30 a barrel.
Bund futures fell 67 ticks to 137.46 after nearly three full points of gains in the previous session, and the yield spread of Italian and Spanish government bonds over German benchmarks narrowed slightly.
(Additional reporting by Blaise Robinson and Antoni Slodkowski)