U.S. lawmakers said on Sunday that a compromise was possible in talks to avert the $600 billion "fiscal cliff", which threatens to send the economy back into recession.

MSCI's world equity index .MIWD00000PUS jumped 0.5 percent to 318.94 points, recovering some of last week's 2.7 percent fall, its biggest five-day drop since early June.

"The thing about markets is if they can see it as light at the end of the tunnel, then they're going to discount that," said Mike Ingam, market analyst at BGC Partners.

"At the moment...there is very little clarity as to what the end game actually is although, of course, everybody expects there to be a compromise."

There was also optimism in Europe where officials looked closer to releasing delayed aid for Greece.

European officials are expected to discuss a two-year funding deal for Greece at a meeting on Tuesday, which would postpone any longer-term solution until after a September 2013 German general election.

European Central Bank policymaker Joerg Asmussen said at the weekend the ministers were likely to agree the deal for Greece and leave resolution of a longer-term debt stabilization plan, at the heart of a disagreement with the IMF, until a later date.

The euro rose 0.3 percent on Monday hitting a high of $1.2788, well above a two-month low of $1.2661 hit last week when suffered a selloff on the worries over Greece and the worsening euro zone outlook.

"As the EU prepares a bundled aid package to avert a Greek default, headlines coming out of the meeting may fuel a relief rally in the euro, but we will maintain our bearish forecast for the single currency as the region faces a deepening recession," said David Song, currency analyst at DailyFX.

European share markets also enjoyed a strong rebound from the lows of last week mainly on the growing optimism over the positive tone of the U.S. political negotiations.

The FTSE Eurofirst 300 index .FTEU3 of top European shares was up 0.8 percent at 1,076.03 points, led by sectors that depend on economic growth, such as auto stocks .SXAP, basic resources .SXPP and banks .SX7P.

In the region's main centers London's FTSE 100 .FTSE, was up 0.9 percent, Paris's CAC-40 .FCHI gained 1.25 percent and Frankfurt's DAX .GDAXI rose 1.3 percent. .L .EU

Gains in U.S. stock futures pointed to a firmer start on Wall Street as well, extending a rally that began on Friday.

Safe haven bond markets reflected the better risk appetite with the 10-year U.S. Treasury yield edging up as prices fell to around 1.60 percent, still only about 22 basis points above a record low set in late July.

The 10-year German government bond yield was steady at 1.34 percent but traders said there was room for yields to rise if euro zone policymakers reached an agreement at their meeting on Tuesday.

DOLLAR STRENGTH

In the currency markets the dollar strengthened against the yen on expectations a new Japanese government will push the central bank into taking aggressive monetary stimulus measures to boost growth after next month's elections.

The greenback rose to 81.59 yen, its highest level since April 25, before settling to trade around 81.25 yen, down 0.2 percent from late U.S. trade on Friday.

The Bank of Japan began a two-day policy meeting on Monday, but is not expected to take any fresh policy steps ahead of the December 16 vote.

In oil markets, Brent crude rose to almost $110 a barrel as the escalating violence between Israel and the Palestinians fuelled concern about supplies from the Middle East.

Investors fear the conflict may draw in other countries and possibly disrupt energy exports from the region, which supplies more than a third of the world's crude.

Brent crude for January delivery was up $1 to $109.95 and U.S. crude futures gained 80 cents to $87.72 a barrel.

(Reporting by Richard Hubbard; Editing by Giles Elgood and Anna Willard)

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