The political divide narrowed on Monday night when President Barack Obama proposed leaving lower tax rates in place for those earning under $400,000, moving closer to the $1 million threshold favoured by Republican House of Representatives Speaker John Boehner.
"It is reassuring that we are now seeing some signs of compromise in the US" said Daiwa Securities economist Tobias Blattner. "A deal is key to avoiding a major global recession; if we were to fall over the cliff, there would be massive fiscal tightening."
European shares were up 0.4 percent as midday approached. London's FTSE 100, Paris's CAC-40 and Frankfurt's DAX climbed between 0.1 and 0.5 percent.
That left them close to an 18-month high and pushed the MSCI index of global stocks up 0.2 percent, near a three-month high, with an 18-month peak also in sight.
Futures suggested Wall Street would open higher, while oil, copper and gold also firmed.
Investors hope putting off the $600 billion of "fiscal cliff" cuts and taxes agreed under previous president George W Bush will give momentum to the fragile recovery in the world's largest economy.
"Regardless of what is decided, the market is looking for a decision, and any compromise will help provide a clearer picture for the future," Ben Taylor, sales trader at CMC Markets, said in a report.
YEN WEAK
The dollar, traditionally seen as a safe-haven currency, fell to a two-month low against a basket of key currencies, as the broader market appetite for risk grew.
Expectations of more monetary easing in Japan following Sunday's return to power of the LDP and its pro-stimulus leader Shinzo ?Abe added to the US-led optimism and provided an additional fillip for Asian equities. Japan's Nikkei hit an 8-1/2 month high.
It also kept the yen near a 20-month low versus the dollar. By 1045 GMT the dollar was worth 83.91 yen, up almost 7 percent compared to when it started rising in early November.
"We are in a situation where we will see the government tell the central bank what to do. Such a politicised situation is never good for a currency, and the yen will weaken," said Peter Kinsella, currency strategist at Commerzbank.
With the European Central Bank looking increasingly unlikely to cut interest rates in the next couple of months, the euro remained near Monday's seven-month high at $1.3175.
Newly installed ECB board member Yves Mersch said he saw no logic in cutting rates at the moment.
Data from the UK showed inflation stayed at its highest level since May, confounding forecasts it would ease and potentially giving the Bank of England less room to resume its quantitative easing to support the struggling economy.
There was an easing bias elsewhere on Tuesday, however. Sweden cut its interest rates by a quarter point back to 1 percent, while India's central bank reiterated its guidance of further easing in the first quarter of 2013.
In European bond markets, trading remained subdued ahead of the year-end. German Bund futures slipped to 144.80 as increasing signs of progress in the US budget talks eased demand for low-risk assets.
Concerns that new fiscal stimulus could seriously increase the country's debt burden pushed the benchmark 10-year Japanese government bond yield to a one-month high of 0.750 percent.