The euro and world shares gained on Wednesday as investor expectations grew that the acute financial problems in Spain would prompt the region's central bank to respond with more stimulus measures.

Though the European Central Bank (ECB) is not widely expected to cut rates when it meets later in the day, it could signal a readiness to take some action as early as next month, given the escalating crisis in the euro zone.

Fears that the problems in Europe are hurting the global economy have also increased speculation that other major central banks could join in another global round of policy easing. 

"The market's expectation regarding further policy action globally is picking up," said Ian Stannard, an executive director at Morgan Stanley.     

The euro rose against both the dollar and the yen on Wednesday, as investors closed bearish positions against the single currency in response to the rising expectations of central bank action.

The single currency hit a high of $1.2521, up 0.5 percent, pulling well away from the two-year low of $1.2288 touched last Friday.

Stannard said recent disappointing data from the United States and Asia, as well as signs the euro area slowdown is affecting core countries such as Germany, would be the spark for another round of policy action by the world's central banks.

"We may actually see central banks having to take further action. That includes the ECB today. We believe a rate cut is possible there, and we believe that quantitative easing from the Fed is also very much back on the table," he said.     
Europe's share markets, back to full strength after two-days of market holidays in the UK that cut volumes, took their cue from a rally in Asia on the stimulus hopes.

The pan-European FTSEurofirst 300 index, rose 1 percent to 962.46 points, led by a gain of 1.8 percent in banking stocks, which stand to gain most from any fresh ECB policy measures.

"Why should you take additional risk and remain exposed to the downside whilst maybe policy makers will do something of a positive surprise?" said Franz Wenzel, a strategist at AXA Investment Managers.     

MSCI's world equity index extended the gains it has been making all week, rising 0.4 percent to 293.98 as all major Asian markets rose.

German bond yields, which hit record lows last week as the nervousness over Spain's finances prompted a surge in demand for less risky assets, were little changed at around 1.27 percent.

Germany will tap the market for 5 billion euros of 5-year bonds that are expected to generate fresh record low yields.  

Oil rose toward $100 a barrel as supportive economic and crude stocks data from the United States outweighed the worries about Europe's lingering debt crisis. Brent crude rose more than $1.10 to $99.94 a barrel before easing back to $99.75, while U.S. crude climbed $1.06 to $85.35 a barrel. - Reuters