European stocks jumped and the euro recovered from week lows today after official data showed an unexpected expansion in China's powerful factories in January and the first growth in German manufacturing in four months.

US equity markets look set to extend the gains, with stock index futures pointing to a higher open as attention switches to the January ISM Manufacturing index, which is expected to point to an ongoing but moderate expansion.

Overall the manufacturing surveys remain relatively grim, with crumbling demand in Europe holding back more buoyant economies in Asia.

But some of the key numbers were better than feared, and that positive combined with hopes that Greece is edging towards a comprehensive deal on restructuring its debt to ease markets' nerves at least momentarily.

"The good Chinese data is definitely helping the market," said Veronika Pechlaner, a fund manager on the Ashburton European equity fund.

China's official purchasing managers' index showed the factory sector expanded slightly in January and the separate indicator from bank HSBC contracted the least in three months.

While euro zone manufacturing activity declined for a sixth straight month in January, there was a slight upturn in Germany which failed to offset a prolonged contraction in the region's smaller economies.

Britain's manufacturing sector also surprisingly returned to growth in January as companies cranked up production, stirring hopes the country will skirt recession.

It all helped European shares gain 1.3 per cent to 1,050.95 points, adding to strong gains of nearly 5 per cent in January, with banks the best performing sector. The euro zone bank index gained 3.9 per cent.

"The core European numbers are more or less in expansionary territory," said Peter Dixon, global equities economist at Commerzbank.

"Germany continues to motor on and show a reasonable amount of dynamism and that will drag France along and maybe Italy, but it is not really going to help the likes of Greece that much and Portugal and maybe Spain will struggle."

The MSCI world equity index, which has enjoyed a strong start to the year, seeing a rise of nearly 6 per cent in January, was up 0.6 per cent at 318.61.

Greece, mired in talks about a debt restructuring needed to secure a second bailout package and avoid a messy default, saw a record drop in production for January and a sharp decline in new orders, which could lead to more job losses.

But investors are increasingly hopeful the debt talks will conclude with a deal that eases fears of a chaotic default which would ripple through the banking sector and debt markets.

Helped by resistance around the psychological 1.30 level against the dollar, the euro erased early losses after the PMI data, to be up about 0.7 per cent to near $1.3170.

The dollar also fell to its lowest in three months against the yen, sparking concerns the Japanese authorities may step in, as traders adjusted positions to reflect the Federal Reserve's pledge to keep interest rates near zero until late 2014, which left the door open to more quantitative easing.

Yields on US Treasuries have fallen sharply since the Fed statement, with the five-year note near levels not seen since at least the 1960s.

Reuters