Investors also took comfort from US retail sales that rose in July for the biggest gain since March. That was tempered somewhat by a separate report that showed consumer sentiment in early August fell to the lowest since May 1980.
Consumer spending accounts for two-thirds of US economic activity, and the retail sales data indicated the third quarter was off to a promising start.
Analysts said the sentiment report was disappointing, but the drop was not too shocking, given recent political wrangling over the US deficit and declines in the stock market.
Equities markets were relatively calm at the end of a whipsaw week sparked by Standard & Poor's downgrading the US credit rating. Wall Street remains on track for its worst three-week decline since March of 2009 when stocks hit 12-year lows.
US stocks were up about 1 percent, while European shares closed up 3.6 percent. Bank shares, which have fallen sharply in recent days, led the move higher in Europe after the ban on short selling imposed by France, Italy, Spain and Belgium.
"Markets have stabilized a little bit after the short-selling ban," said Colin McLean, managing director at SVM Asset Management in Edinburgh. "But banks have fallen pretty far and most are oversold and are just bouncing off low levels."
The MSCI world equity index rose 1.3 percent.
The Dow Jones industrial average gained 160.45 points, or 1.44 percent, to 11,303.76. The Standard & Poor's 500 Index added 11.78 points, or 1.00 percent, to 1,184.42. The Nasdaq Composite Index rose 26.79 points, or 1.07 percent, to 2,519.47.
EURO ZONE WOES
The four countries banned short selling -- borrowing shares and selling them in expectation the price will fall -- of a group of banks and financial institutions after a flurry of rumors knocked a third of the value off some European bank shares this month.
Traders said the measure would provide temporary relief to jittery investors. But concerns about euro zone debt problems and a deteriorating outlook for the global economy would keep trading erratic.
"Data from various regulators of late have shown there is no short-selling activity out of the norm," said Davide Burani, financial analyst at Italian fund manager Horatius.
Troubles in the euro zone were not very far from investors' minds as the Italian government was set to pass a sweeping package of spending cuts and tax increases as it scrambles to meet European Central Bank demands for action to shore up confidence in its public finances.
"Investors are selling in Italy from fear. Italian banks are holding around 200 billion euros of Italian bonds," said Burani.
The strain in the dollar funding market, however, remains high, as investors are skittish to lend their dollars due to doubts that European authorities could solve the debt crisis.
The benchmark London interbank offered rate on three-month dollars hit four-month highs of 0.29006 percent versus 0.28617 percent on Thursday. The rate is a gauge of how willing banks are to lend to one another.
The Swiss franc fell sharply against the euro for a second session, a day after the Swiss National Bank said it may peg the franc to halt its rally, though many analysts said such a move was unlikely.
Safe-haven gold extended the previous session's retreat from record highs. Spot gold was down 1.7 percent at $1,735.64 an ounce. It is still on track to rise more than 4 percent this week, and has risen 22 percent so far this year on a potent mix of concerns over US and euro zone debt levels and economic growth.
The benchmark 10-year Treasury note was last trading 25/32 higher in price and yielding 2.26 percent, down from 2.35 percent late on Thursday.
Copyright Reuters, 2011