By Richard Hubbard
LONDON (Reuters) - Growing optimism that euro zone leaders are on track to produce a confidence-boosting package of measures to solve the debt crisis at Friday's summit lifted risk appetite on Wednesday, with the euro and global equity markets posting gains.
EU officials are reported to be working on a last-minute proposal to raise the combined lending limit of the EFSF rescue fund and the permanent structure that will replace it, the ESM. The latter fund was due to be launched in 2013 but efforts are said to underway to bring that forward by a year.
"Investors are pinning a lot on this summit. Those hopes that Europe will be able to piece a deal together are still growing," said Keith Bowman, equity analyst at Hargreaves Lansdown.
The MSCI world equity index <.MIWD00000PUS>, which ended a recent rally to dip on Tuesday after Standard & Poor's told 15 euro zone member nations it may cut their debt ratings, was slightly firmer.
The optimism also saw European shares resume their recent rally with the FTSEurofirst 300 <.FTEU3> index of top European shares up 1 percent, adding to gains of more than 11 percent since late November.
The euro edged higher versus the dollar, holding above a one-week low hit the previous session, on the cautious optimism over the outcome at the leaders summit later this week.
Gains were capped, however, by concerns that policymakers could disappoint markets yet again and the limited scope of the euro's bounce suggested investors were wary about its outlook.
"The market has again and again bought into the idea of a comprehensive and convincing solution from policymakers so there is potential for some short-term upward movement in the euro today," said Ulrich Leuchtmann, head of currency research at Commerzbank.
"Some people are also preparing for the ECB to announce something more drastic," he said.
In European bond market demand for core German government debt eased ahead of an auction of new five-year paper, with investors wary after a debt sale two-weeks ago failed to get enough bids to cover the amount offered.
After the world's central banks weighed in with fresh dollar liquidity last week, the ECB's 7-day dollar tender will give the latest indication of funding stress for Europe's banks.
The Bank of England starts its final two-day rate-setting meeting of the year amid signs inflationary pressures are easing.
The British Retail Consortium (BRC) said retail inflation grew at its slowest pace for a year in November, held back by supermarket discounts at the start of the crucial Christmas shopping period.
Attention is also switching to the ECB policy meeting on Thursday where expectations of an interest rate cut have risen after statistics agency Eurostat confirmed estimates pointing to weakening growth.
In commodity markets Brent crude rose above $111 a barrel after the euro strengthened against the U.S. dollar on the hopes of a credible solution to the euro zones problems.
(Additional reporting by Nia Williams and Atul Prakash)
Corrects first paragraph to show summit on Friday.