LONDON (AP) -- Signs that U.S. politicians are inching toward a budget deal that will avoid potentially damaging tax increases and spending cuts shored up markets Tuesday.
Investors are hopeful progress is being made between the White House and Congress on a budget deal before a year-end deadline. If a deal is not found, there will be automatic changes to taxes and spending — the so-called "fiscal cliff" — that many economists argue could eventually send the U.S. economy, the world's largest, into recession.
Following a weekend retreat by John Boehner, the Republican Speaker of the House of Representatives, over tax increases, President Barack Obama on Monday dropped his long-held insistence that taxes rise on individuals earning more than $200,000 and families making more than $250,000. He is now offering a new threshold of $400,000 and lowering his 10-year tax revenue goals from the $1.6 trillion he had argued for a few weeks ago.
Boehner told reporters Tuesday that he remains hopeful that a compromise can be reached but says Obama has yet to offer a balanced deficit-cutting plan. Boehner said Obama's latest offer of $1.3 trillion in tax increases over the next decade with $850 billion in spending cuts is not balanced enough.
Despite his apparent caution, investors remained hopeful that a deal is within reach.
"Arguably the market's mood has moved from one of hope to encouragement," said Nick Bennenbroek, an analyst at Wells Fargo Bank.
In Europe, the FTSE 100 index of leading British shares was up 0.5 percent at 5,943 while Germany's DAX rose 0.7 percent to 7,657. The CAC-40 in France was 0.3 percent higher at 3,650.
In the U.S., the Dow Jones industrial average was up 0.5 percent at 13,301 while the broader S&P 500 index rose 0.7 percent to 1,440.
The more optimistic market tone has diminished investors' fears to take on riskier assets. That's further boosted the euro, which was up another 0.4 percent at $1.3218, its first foray above $1.32 since early May. The common European currency has been buoyed in recent months by a drop in market fears over the financial crisis afflicting the 17-country eurozone.
Attention over the rest of the day will likely remain fixed on the budget discussions given that there is very little time left to agree a deal and then push it through both arms of Congress.
"There is a danger though that both parties will now revert back to their previous tactics of negotiating hard and utilizing the media to gather support," said Craig Erlam, market analyst at Alpari. "This would not benefit either side at this point and would only put the U.S. at risk of another embarrassing downgrade, as we saw last year following debt ceiling negotiations."
Markets have also been supported by hopes of more stimulus measures from China and Japan, the world's second and third largest economies.
In Japan, the focus remains on the weekend landslide election victory of the Liberal Democratic Party, whose leader, Shinzo Abe, in line to become prime minister, wants to shore up growth with higher public works spending.
That was despite concern about the consequences of adding to Japan's towering public debts and doubts about the effectiveness of looser policy.
Chinese stimulus hopes, meanwhile, were raised by a weekend pledge by new Communist Party leaders to support a recovery with more spending and easy credit if needed. They also promised reforms aimed at expanding private business.
In Asia, Tokyo's Nikkei 225 rose 1 percent to 9,923.01, adding to the previous session's 0.9 percent gain. China's benchmark Shanghai Composite Index was up 0.1 percent to 2,162.46 while Hong Kong's Hang Seng fell 0.1 percent to 22,494.73.
Oil prices tracked equities higher, with the benchmark New York rate up 57 cents at $87.77 a barrel.
Joe McDonald in Beijing contributed to this report.