European stocks were up 1.2 percent in morning trade, extending the previous session's rally as investors brushed aside S&P's downgrade of the euro zone's EFSF bailout fund to focus on China's slightly better-than-expected growth data. .EU

Asian stocks also gained ground, as well as the euro currency as the Chinese GDP growth data soothed investor concerns the euro zone debt crisis was denting global activity.

Late on Monday, S&P cut its credit rating of the European Financial Stability Facility, the euro zone's rescue fund, by one notch to AA+, in the wake of Friday's widely expected mass downgrade of a number of euro zone countries, with investors relieved that France was only downgraded by one notch, pushing down the country's borrowing costs at a T-bill auction.

Investors awaited earnings reports from a number of companies on Tuesday, including Citigroup Inc (C.N), Forest Laboratories Inc (FRX.N), Linear Technology Corp (LLTC.O), M&T Bank Corp (MTB.N), and Wells Fargo & Co (WFC.N).

U.S. Treasuries were pressured on Tuesday, bolstering yields, as the better-than-expected Chinese data gave equities markets a lift and pushed fears about the euro zone debt crisis out of the spotlight.

Federal Reserve Governor Elizabeth Duke said on Monday that she was open to the U.S. central bank adopting an explicit inflation target, a step officials are expected to consider at a meeting later this month.

AIA Group Ltd (1299.HK), Asia's No.3 insurer and about one-third owned by American International Group Inc (AIG.N), may bid for the $6 billion Asian insurance operations of ING Groep (ING.AS), sources said, with the prospective sale expected to draw heavy interest from rivals.

Investment bank Morgan Stanley plans to tell employees this week that bonuses will drop, with cash payouts capped for now at $125,000, The Wall Street Journal reported on Monday.

Morgan Stanley's global real estate fund is to buy a mall in St. Petersburg for more than $1 billion, Bloomberg reported on Monday citing sources.

France's EDF (EDF.PA) has agreed to withdraw its opposition to power group Exelon's (EXC.N) purchase of Constellation Energy Group (CEG.N) after reaching a deal to protect the operating independence of its nuclear joint venture with Constellation.

U.S. stocks dropped on Friday, snapping a four-day winning streak, after news reports that Standard & Poor's would downgrade credit ratings on several euro-zone countries.

The Dow Jones industrial average .DJI dropped 48.96 points, or 0.39 percent, to 12,422.06 at the close. The Standard & Poor's 500 Index .SPX lost 6.41 points, or 0.49 percent, to 1,289.09. The Nasdaq Composite Index .IXIC fell 14.03 points, or 0.51 percent, to 2,710.67.

(Reporting by Blaise Robinson; Editing by Hans-Juergen Peters)

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