Greek Prime Minister George Papandreou won his cabinet's backing on Wednesday to hold a referendum on the euro zone's 130-billion-euro bailout package, aimed at containing the debt crisis.
Investors are looking ahead to the Greek government's confidence vote on Friday. If Papandreou loses the vote, a general election will be called and most likely there will be no referendum.
In the meantime, investors will likely remain nervous about the solvency of Greece and the euro zone's financial stability should there be a referendum, which would take place in early 2012, analysts said.
"After yesterday's sell-off, some bounce was expected, but we think there are a lot of hurdles for the euro to clear and given the risk events, we do not see it rallying much," said Adam Myers, senior currency strategist at Credit Agricole in London.
Papandreou will later face the leaders of France and Germany, who summoned him for crisis talks in Cannes before a G20 summit of major world economies to push for quick implementation of the bailout deal.
Rejection of the package could lead to a disorderly default for Greece, with the fallout affecting the European banks that hold Greek debt.
The euro rose 0.8 percent against the dollar to $1.3807 and gained 0.4 percent versus the yen, to 107.66 yen.
The MSCI world equity index rose nearly 1 percent after losing 6 percent in the previous two sessions.
Less-dismal data on the US job market and hopes of more policy easing from the US Federal Reserve and the European Central Bank also supported stocks and the euro and exerted selling pressure on German Bunds and US Treasuries.
The Fed could begin to prepare financial markets for further monetary easing at the conclusion of a two-day meeting later on Wednesday, even if it refrains from any new stimulus after implementing its $400 billion "Operation Twist" in October.
The US central bank will release its latest policy statement at 12:30 p.m. (1630 GMT), followed by a press conference by Fed Chairman Ben Bernanke at 2:15 p.m. (1815 GMT).
On Wall Street, the Dow Jones industrial average was up 212.29 points, or 1.82 percent, at 11,870.25. The Standard & Poor's 500 Index was up 23.47 points, or 1.93 percent, at 1,241.75. The Nasdaq Composite Index was up 40.55 points, or 1.56 percent, at 2,647.51.
European stocks rose 1 percent, recovering early losses ahead of the US open.
In Tokyo, the Nikkei closed down 2.2 percent following Tuesday's sell-off on Wall Street and in Europe.
The stabilization in stocks and the euro led investors to reduce their safe-haven holdings of US and German debt.
Bund futures fell 70 basis points to 137.44 after touching a near one-month high on Tuesday, while the benchmark 10-year US Treasury note fell 15/32 in price to yield 2.04 percent.
In the commodities market, Brent crude futures in London were up $1.61 at $111.15 a barrel, while US crude futures were $1.21 higher at $93.40.
Spot gold rose 1.4 percent to $1,742.99 an ounce.
Copyright Reuters, 2011