The ECB unexpectedly lowered key interest rates by a quarter percentage point to 1.25 percent, its first cut since May 2009, citing the euro zone's worsening debt crisis. President Mario Draghi said the euro zone could subside into a "mild recession" in the latter part of 2011.

The rate cut, which Draghi said was a unanimous decision by the ECB's 23-member Governing Council, gave a boost to global stock markets. While lower rates make the euro less appealing than higher yielding currencies, encouraging news out of Greece had investors embracing the single currency.

Greece's teetering government backed away from a proposed referendum on staying in the euro, while European leaders talked for the first time of a possible Greek exit to preserve the single currency.

Greek Prime Minister George Papandreou's call earlier this week for a referendum sparked panic in global financial markets as it threatened last week's long-awaited agreement to cut Greek debt and strengthen a euro zone rescue fund.

Greek Finance Minister Evangelos Venizelos called on the Greek government to categorically rule out a referendum on a crucial bailout plan and do everything to implement the deal.

In late afternoon New York trading, the euro was up 0.7 percent at $1.3846. It traded below $1.37 in the wake of the dovish comments from Draghi.

"The euro has been bouncing around like a yo-yo today," said Brian Dolan, chief currency strategist at Forex.com in Bedminster, New Jersey.

"People had been short based on the ECB rate cut and warnings of economic weakness, but those shorts are being squeezed out," he said. "This is another short squeeze and with the referendum looking to be off the table the confidence vote tomorrow should pass, clearing the way for Greece to avoid a disorderly default."

Turmoil within Greece's ruling party has instilled serious doubts on whether Prime Minister George Papandreou can survive Friday's confidence vote.

German Finance Minister Wolfgang Schaeuble told Greece to make up its mind now on whether it wants to remain in the euro, but said it was up to the Greek people whether they wanted to decide this via elections or a referendum.

The euro rose 0.7 percent versus the yen to 108.02 yen while the dollar was unchanged at 78.02 yen.

The ECB decision was made despite elevated inflation at 3 percent as of October and suggested that the central bank's hawkish concerns are taking a back seat to concerns surrounding the euro zone debt crisis.

The ECB rate cut and a drop in US jobless claims helped feed a bid for riskier assets.

Trading was volatile ahead of Friday's US nonfarm payrolls report, a key driver of financial markets.

A Reuters poll of economists expect the US Labor Department to report an October nonfarm payrolls gain of 95,000.

"I'm looking for a bigger number of 140,000 on account of continued resilience in the US economy in the face of challenging times," said Andrew Wilkinson, chief economic strategist at Miller Tabak & Co. in New York. "Both manufacturing and service sector ISM reports this week pointed to strengthening employment readings despite both missing on the headline number."