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European stock markets rebounded while the euro slid against the dollar on Friday as traders welcomed improving economic fortunes in Germany and looked ahead to weekend elections in indebted eurozone nation Italy.
Equities had fallen on Thursday over concern about a possible end to US stimulus measures and slumping business activity across the eurozone.
London's FTSE 100 index of top companies rose 0.66 percent to 6,333.03 points in afternoon trading, Frankfurt's DAX climbed 0.76 percent to 7,640.95 points and in Paris the CAC 40 jumped 1.65 percent to 3,684.46.
Milan advanced 1.35 percent to 16,224.94 points.
"European equities managed to reverse losses and are rallying nicely now," said Gekko Global Markets trader Anita Paluch.
"And while the Italian elections are still ahead of us, with Friday being the last trading session before the voting, welcoming news came out of Germany."
A contraction in the German economy at the end of last year was a hiccup, analysts said on Friday, as data showed business confidence in Europe's economic powerhouse soaring this year.
The federal statistics office Destatis confirmed an earlier estimate that German gross domestic product (GDP) contracted by 0.6 percent in the final quarter of 2012, weighed down by a 2.0-percent slump in exports.
Nevertheless, a whole range of experts -- from analysts to economic think tanks, the government and even the Bundesbank -- are convinced that the dip in growth will prove only temporary and GDP will start growing again as early as the first quarter of 2013.
Economic sentiment in Germany could hardly be better.
Earlier this week, the key ZEW barometer of investor confidence rose to levels last seen before the start of the three-year-old debt crisis.
And on Friday, the even more closely watched Ifo business climate index notched up its strongest gain in two and a half years to hit its highest level since April 2012.
"The German economy is regaining momentum," said Ifo president Hans-Werner Sinn as his institute's index jumped by 3.1 points to 107.4 points in February.
But the eurozone as a whole faces another full year of recession in 2013, as millions more people living across the region become unemployed, the European Commission said on Friday.
-- Elections in Italy --
Economic output is set to shrink by 0.3 percent after a 0.6-percent contraction last year, the EC said.
It meanwhile predicted that the unemployment rate across the 17-state currency area would hit 12.2 percent for 2013, up from 11.4 percent last year -- which could take the number of unemployed people in the eurozone above the 20-million mark.
Italy was meanwhile poised to hold its most important elections in a generation starting on Sunday, as financial markets warned an unclear outcome could plunge the eurozone's third economy back into crisis.
Italians will cast their ballots as they grapple with the longest recession in two decades and several rounds of austerity cuts.
The most likely outcome is a centre-left government led by Democratic Party leader Pier Luigi Bersani, a cigar-chomping former communist who now espouses broadly pro-market economic views.
The European single currency drifted down to $1.3183 from $1.3188 late in New York on Thursday. The dollar rose to 93.34 yen from 93.11 yen, while the British pound steadied a day after reaching a 2.5-year low point versus the dollar.
Gold prices rose to $1,580 an ounce on the London Bullion Market from $1,577 on Thursday, when the precious metal also struck a seven-month low point of $1,555.55.
US stocks moved higher in opening trade, boosted by the bullish report on German business sentiment and solid earnings results from computer company Hewlett-Packard.
The Dow Jones Industrial Average rose 0.47 percent to 13,945.95 points after five minutes of trading.
The broad-based S&P 500 advanced 0.54 percent to 1,510.48 points, while the tech-rich Nasdaq Composite Index jumped 0.66 percent to 3,152.20 points.
Shanghai ended down 0.51 percent and Hong Kong lost 0.54 percent.