The euro hit a fresh 14-month high and European stocks gained on Friday after economic data raised hopes that the region's downturn has eased, but moves were limited as investors await a U.S. jobs report.
Euro zone factories had their best month in nearly a year during January although the currency bloc is likely to remain mired in recession for a few more months, the latest reading of Markit's Purchasing Managers' Index (PMI) showed.
"Providing there are no further setbacks to the region's debt crisis, these data add to the expectation that the euro zone is on course to return to growth by mid-2013," said Chris Williamson, chief economist at data compiler Markit.
The euro hit a high of $1.3657 after the data came out, its highest level since November 2011. The common currency also hit a 33-month high against the yen, rising more than 1 percent to 125.96 yen.
The pan-European FTSEurofirst 300 index <.FTEU3> extended its recent gains by 0.4 percent to 1,169.14 points, near a 23-month high after solid rally since the start of the year. London's FTSE 100 <.FTSE>, Paris's CAC-40 <.FCHI> and Frankfurt's DAX <.GDAXI> were up between 0.5 and 0.8 percent.
Earlier, China's official PMI for January eased to 50.4, missing market expectations for a rise and underscoring the fragility of the recovery from the economy's weakest year since 1999.
However, a separate private survey showed that growth in China's giant manufacturing sector hit a two-year high in January as domestic demand strengthened, underlining hopes the nation's economic recovery is slowly gaining momentum.
The Chinese data left MSCI's broadest index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> little changed
The euro has risen significantly in recent weeks as the outlook for the 17-nation currency bloc has improved, and also as investors respond to the sharply easier monetary policies of the U.S. Federal Reserve and Bank of Japan.
"The perception is that the ECB is being less supportive and is not providing as much liquidity as the other central banks are," said Andrew Milligan, head of Global Strategy at Standard Life Investments.
At the same time liquidity in the European money markets is being affected by quicker-than-expected repayments of crisis loans handed out by the ECB at the height of the bloc's crisis just over a year ago.
Banks have another two years to pay back the money if they want, but have taken the opportunity this week to return over a quarter of the 489 billion euros ($663.77 billion) they took in the first of the ECB's two "LTRO" handouts.
From now on they can pay back as little or as much of the remaining money as they want each week. After the fast start, analysts are awaiting Friday's details of next week's repayments for clues on whether the pace is likely to continue.
Money market rates have already risen by a quarter of a percentage point since the start the year - the equivalent of a standard ECB interest rate increase - and are likely climb by at least the same amount again if the money continues to drain rapidly from the system.
For Europe's struggling countries and the ECB this is not an ideal situation, effectively tightening monetary policy and creating unwanted stress just as economies are showing fragile signs of improvement.
Friday's U.S. nonfarm payrolls data due at 8:30 a.m. ET could be a another factor to drive the euro higher, as a strong report would knock the safe-haven dollar.
The dollar was trading at a 3-1/2 month low against a basket of currencies <.DXY> on Friday after falling 0.3 percent to 78.97 points.
Employers are expected to have added 160,000 new jobs to their payrolls in January, a marginal step up from December's 155,000 gain, according to a Reuters survey of economists. The unemployment rate is seen holding steady at 7.8 percent.
The U.S. economy unexpectedly contracted in the fourth quarter, its weakest performance since emerging from recession in 2009, and it grew just 2.2 percent in the whole of 2012.
The U.S. ISM factory survey, a national report on the state of American manufacturers, is also due at 10 a.m. ET.
(Additional reporting by Marc Jones,; editing by Philippa Fletcher)