European shares rallied today as fund managers said strong earnings would support markets in the short term, overshadowing economic risks.

They said the sell-off after Standard & Poor's said the US government may lose its top credit rating if the White House and the Republican-controlled Congress can not agree a plan to cut soaring borrowing had been overdone, with Wall Street ending although down, off its lows yesterday.

"The market should be supported at these levels despite the global macro economic concerns. The US market closed well off its lows, so the response in the state was fairly sanguine," James Buckley, head of European equities at Baring Asset Management, said.

However, traders said investors could turn cautious later in the session ahead of results in the United States from
banking heavyweight Goldman Sachs.

"We have Goldman Sachs later and there could be some caution before that, one negative comment from anyone
and we could be back down." Simon Clark, trader at ETX Capital said.

S&P yesterday called into question the ability of the United States to pay its debts for the first time in the four-year-old global economic crisis.

The opinions of credit-rating agencies are closely watched by institutional investors such as pension funds and insurance firms, which lend to governments by buying their bonds. The interest rate the US pays on its borrowings rose immediately on the back of the announcement before recovering ground later.

Global stock markets fell on fears that increased borrowing costs would hamper recovery in the US economy with knock-on effects globally. Increased fears that Greece would default also scared investors.

S&P said yesterday there was a one in three chance it might cut the US's credit rating from AAA over the next two years. "We believe there is a material risk that US policymakers might not reach an agreement on how to address medium- and long-term budgetary challenges by 2013," New York-based S&P said.

"If an agreement is not reached and meaningful implementation does not begin by then, this would, in our view, render the US fiscal profile meaningfully weaker than that of peer 'AAA' sovereigns", such as Germany and the UK.

Ireland, which enjoyed AAA rating three years ago, has had its credit rating cut several times since the crisis reduced the Government's ability to pay its debts.

S&P rates Ireland as BBB, some three "notches" below AAA and just above a level after which it cannot be considered investment quality.

The White House rejected the criticism, with US president Barack Obama's chief economic adviser characterising it as a "political judgment" he said did not deserve "too much weight".

"They are saying their political judgment is that, over the next two years, they didn't see a political agreement" to reduce long-term deficits, Austan Goolsbee, chairman of the Council of Economic Advisers, said.

He said Mr Obama and Republican congressional leaders were "pretty close" in the deficit reduction targets they announced for debt reduction. Last week, Mr Obama announced a plan to cut $4 trillion off the national debt within 12 years.

The SP warning came amid renewed anxiety about the rising prospect of a restructuring of Greece's €325 billion debt. Any restructuring – or default – on Greek sovereign debt would be the first in western Europe for over 50 years.

While the country has insisted it can continue to service its entire debt, there is mounting anxiety in official circles it will not be able to return to market financing as planned next year if drastic measures are not taken to cut its debt burden.

Euro zone officials are divided, however, with some saying repeated talk about restructuring does nothing to restore investor confidence. Berlin has denied reports that German officials believe Greece will have to restructure its debt this year.

The reports, in international media, have led European officials to conclude that chancellor Angela Merkel is turning towards restructuring.

However, a senior German official insisted that the assumption in the Greek bailout was that its debt "is sustainable if the programme is implemented in full for all of the four years".

Additional reporting: Reuters