The euro gained against most major currencies on Thursday while European shares turned lower ahead of a European Central meeting which could shed new light on its bond buying plans and region's economic outlook.
The European Central Bank is not expected to cut rates at the monthly policy making session despite weaker economic data, but was seen likely to be pressed on negotiations with Spain over its financing needs in the news conference which follows.
Markets are waiting for Spain to request a rescue from other euro zone members which would trigger a new ECB bond buying program, boosting the single currency and sending peripheral government bond yields sharply lower.
"It is a not a question of if but when for Spain and that will be seen as a huge relief for the market," said Robin Bhar, an analyst at Societe Generale, referring to the expected bailout.
The euro hit two-week highs against the Japanese yen, the British pound and the Swiss franc ahead of the ECB meeting and was up 0.3 percent against the dollar at $1.2942.
A successful debt sale by Spain of four billion euros in shorter-dated government bonds, which drew strong interest from investors, also supported the better tone in the currency.
Investors bid for twice the amount on offer for the three-year bonds in the Spanish auction, reflecting high expectations of ECB support, although Madrid had to pay slightly more than at a similar auction a month ago.
The average yield on the paper was 3.956 percent versus an average this year of 3.825 percent.
"There is a natural demand given the expectation that at some point Spain will request a sovereign bailout and the ECB," RIA Capital Markets bond strategist Nick Stamenkovic.
In the stock markets, prices had risen in early trade in line with gains in Asian shares following upbeat employment and service sector data from the United States on Wednesday which had countered some of the gloom coming from Europe and China.
The FTSE Eurofirst <.FTEU3> index of top European shares, which had gained 0.3 percent in early trade was down was down 0.1 percent at 1,099.11 points by late morning.
Wednesday's upbeat U.S. economic data has encouraged hopes that Friday's key non-farm payrolls report may surprise on the upside, putting more focus on the weekly jobless claims data and factory orders numbers for August due out later.
Markets also got a slight lift from a gain in U.S. stock futures after an early U.S. poll found 67 percent of registered voters surveyed thought Republican candidate Mitt Romney, seen as pro-business, won the first widely watched election debate with President Barack Obama.
But equity investors are cautious about extending the rally begun in September in response to moves by the world's major central banks to stimulate their economies until they see confirmation of an improving outlook.
"The market is caught between earnings momentum which has turned heavily negative during the third quarter, a significant policy response to the slowdown in global growth ... and now there's a debate about the effectiveness of the policy actions that they've taken," said Darren Winder, equity strategist at Oriel Securities.
U.S. markets were looking slightly more positive due to the better economic data with U.S. stock index futures pointing to a higher open on Wall Street on Thursday. <.N>
The improving U.S. outlook was also supporting demand in commodities markets, with gold gaining for a fourth day and copper rallying , while Brent crude oil for November was up 70 cents per barrel.
However, rising geo-political concerns emanating from the Middle East is keep a cap on the gains with rising social unrest in Iran and a growing dispute between Turkey and Syria adding to the regional tensions.
(Additional reporting by Harpreet Bhal and Alistair Smout; Editing by Philippa Fletcher and Giles Elgood)