LONDON (AP) -- Markets retained their optimistic tone Tuesday even though U.S. leaders have yet to thrash out a budget deal that could prevent recession in the world's largest economy and despite concerns over Italy's political and economic future.
The longer a U.S. deal to avoid the so-called fiscal cliff of automatic tax increases and spending cuts at the start of next year fails to emerge, the more fidgety investors are likely to become.
Considering also concerns over upcoming Italian elections and their impact on the country's efforts to tackle its financial crisis, the mood in the markets has the potential to reverse sharply.
"The fiscal cliff and European sovereign debt situations remain lurking in the wings and could well provide some quick price action if we see any developments," said Fawad Razaqzada, market strategist at GFT Markets.
In Europe, the FTSE 100 index of leading British shares was up 0.2 percent at 5,931, while Germany's DAX rose 0.6 percent to 7,579. The CAC-40 in France was 0.8 percent higher at 3,642.
In the U.S., the Dow Jones industrial average was up 0.5 percent at 13,233 while the broader S&P 500 index rose the same rate to 1,426.
As has been the case for much of the period since President Barack Obama won re-election early last month, the gaze of U.S. investors remains on whether he and Congress can agree to a budget deal to avoid the fiscal cliff, which many economists think would tip the U.S. back into recession.
"Like the debt ceiling drama of 2011, investors expect the fiscal cliff debate to run to the wire, but overwhelmingly believe a solution will be found," said Mike McCudden, head of derivatives at Interactive Investor.
Investors will also be awaiting Wednesday's latest policy statement from the U.S. Federal Reserve. Many expect the central bank to initiate a new bond-buying plan at the end of its two-day meeting in the hope of tempting companies and individuals to borrow through low interest rates. The current program expires this year.
Outside the U.S., investors are keeping a close watch on developments in Italy following the surprise weekend announcement by Italian Prime Minister Mario Monti that he will resign after Italy's 2013 budget has gone through Parliament.
Monti, a technocratic leader who has been credited with restoring confidence in Italy's economy, said he found it impossible to lead after former Prime Minister Silvio Berlusconi's party, Parliament's largest, dropped its support for the government.
Analysts fear Monti's unexpected resignation could spark a new round of Italian political turmoil and slow efforts to get one of Europe's largest economies back in shape. That prompted a big spike in Italy's borrowing costs Monday as well as falls on the Milan stock exchange.
Some calm appeared to have been restored Tuesday, with the yield on Italy's 10-year bonds down 0.05 percentage points at 4.71 percent and the FTSE MIB in Milan up 1.2 percent.
The euro was also firm, trading 0.3 percent higher at $1.2984.
Earlier, markets in Asia appeared to take in stride news that HSBC, the British banking giant, will pay $1.9 billion to settle a money-laundering probe by federal and state authorities in the United States. HSBC shares rose 0.3 percent in Hong Kong and fell 0.3 percent in London.
Japan's Nikkei 225 index fell 0.1 percent to 9,525.32, with Japanese utilities coming under pressure a day after a team of geologists said that a nuclear power plant in western Japan is likely located on an active fault. Japanese guidelines prohibit nuclear facilities above active faults.
Hong Kong's Hang Seng rose 0.2 percent to 22,323.94 but shares in mainland China fell, with the main Shanghai index closing 0.4 percent lower at 2,172.50.
Oil prices tracked equities higher, with the benchmark New York rate up 33 cents at $85.89 a barrel.