NEW YORK (Reuters) - Stocks rose on major world markets on Wednesday after encouraging U.S. data and a rally in crude oil prices, but the euro slipped ahead of a European summit seen as unlikely to produce a credible solution to the region's debt crisis.
Wall Street stocks logged their largest gain in a week, with the S&P 500 i ndex r ising n early 1 . 0 percent. T he rally came after data showed demand for long-lasting U.S. manufactured goods rose sharply more than expected in May and U.S. pending home sales hit a two-year high.
On commodity markets, U.S. crude oil prices recovered to above $80 per barrel and Brent crude in London erased early losses as a strike by Norwegian oil workers dragged on.
The rally in oil helped accelerate gains in U.S. stocks, with shares of energy firms among the biggest gainers.
While investors welcomed the rebound, few had illusions about the market's long-term trend as the euro zone crisis rumbled on without a solution.
"Sentiment is pretty negative - when you get people this depressed markets have a tendency to bounce and that is pretty much where we are at right now," said said Doug Foreman, director of equities at Kayne Anderson Rudnick Investment Management, an affiliated manager of Virtus Investment Partners in Los Angeles, California.
European Union leaders remained unusually divided ahead of the two-day summit beginning Thursday over how to stem the bloc's spreading debt crisis, now in its third year.
EUROPEAN LEADERS AT ODDS
In a comment earlier this week, Bridgewater Associates, the world's largest hedge fund, noted that European sovereign and bank deleveraging could very well be a disorderly event, even as investors seem to be betting otherwise.
"This 'fat tail' event must be considered a significant possibility," Bridgewater wrote.
Even before the summit, Germany's Angela Merkel had said total debt liability would not be shared in her lifetime, giving little support to Italian and Spanish pleas for immediate action. Rome and Madrid have seen their borrowing costs spiral to a level which for Spain at least would not be sustainable.
"Merkel continues to paint the newswires with her thoughts on the EU way forward as the Eurobond concept does not appeal to her still, and the EU blueprint seems a little off in her eyes," said Brad Bechtel, managing director at Faros Trading in Stamford, Connecticut.
"I don't think we will get anything substantive out of the EU summit and neither does the market after having been told as much over the past several days by EU officials."
At the close, the Dow Jones industrial average was up 92.34 points, or 0.74 percent, at 12,627.01. The Standard & Poor's 500 Index was up 11.86 points, or 0.90 percent, at 1,331.85. The Nasdaq Composite Index was up 21.26 points, or 0.74 percent, at 2,875.32.
European shares also rallied on the upbeat U.S. data, closing up 1.4 percent for their largest gain since June 19.
The MSCI world equity index rose 0.9 percent, though it remained down week-to-date.
The euro edged lower, slipping against the U.S. d ollar for a third straight day as it traded 0.2 percent down at $1.2467.
Growing concerns that more peripheral euro zone nations will be shut out from capital markets and expectations that fiscal austerity will drag the region into a more painful recession will see the euro stay under pressure. Any bounce toward the $1.27 or $1.28 level would attract sellers, traders said.
"I am going short euro/dollar into the summit," said Stuart Frost, head of absolute returns and currency at RWC Capital, a London-based fund manager. "The euro should be a lot lower than what it is and even if there is an agreement, chances of which are very low, the currency is headed towards $1.20."
Debt markets continued to reflect the worsening funding outlook for many euro zone nations, with investors reluctant to increase their exposure even to safe-haven debt ahead of the leaders' summit.
Italy's six-month borrowing costs rose to 2.957 percent at auction on Wednesday, their highest since December. The spike comes just ahead of a five- and 10-year debt sale for up to 5.5 billion euros on Thursday. On Tuesday, Spain saw its short-term borrowing costs nearly triple.
The benchmark 10-year U.S. Treasury note was up 2/32, its yield at 1.6211 percent.
Markets had been hoping this week's summit would deliver at least a high-level agreement on greater fiscal and financial integration across the euro area that could then ultimately lead to the issuance of common euro bonds.
"It is slightly different than what we saw before other summits in the past when hopes were quite high," said Norbert Wuthe, senior government bond strategist at Bayerische Landesbank. "Now we are disappointed going into the summit and there is a positive surprise potential."
(Additional reporting by Angela Moon, Rodrigo Campos, Ryan Vlastelica, Nick Olivari and Wanfeng Zhou in New York, and Richard Hubbard and Marius Zahariain London; Editing by Andrew Hay and Chizu Nomiyama)