Signs of recovery in Germany helped lift European stocks today but the markets' key focus was what the US Federal Reserve would say about the country's economy after a meeting later in the day.
The dollar hit a three-year low against the yen but rose against the euro and was seen making further gains on the single currency if the Fed's interest rate-setting body issues a positive statement on the economy later today.
The FOMC, which is not expected to change rates, is due to announce its decision this evening.
The closely watched west German Ifo index rose for a sixth consecutive month, climbing to 94.2 from a revised 92.0 in September, compared with a forecast of 92.3 in a Reuters poll. "It's a good number but does no more than suggest we are in the early stages of a cyclical upswing in Germany and Europe," said Mr Darren Williams, European economist at Citigroup.
Analysts said the Ifo reading helped lift European stocks, which were also boosted by an asset sale by British American Tobacco (BAT).
US stocks rose yesterday as two mega-mergers encouraged investors to buy shares. Bank stocks rose after Bank of America said it agreed to buy FleetBoston Financial for about $43 billion in a move likely to lead to more deals in the sector.
In the other deal, Anthem said it would buy WellPoint Health Networks for about $14 billion to create the country's largest health insurer.
The Dow Jones Industrial average closed up 0.27 per cent and the tech-dominated Nasdaq closed 0.93 per cent higher.