* Banks lead European shares higher, Wall St seen lower
* Euro edges up vs dollar before ECB meeting
* Aussie dollar falls, stocks rise, after GDP drop
* Oil dips on doubts over impact of OPEC deal
* Graphic: World FX rates in 2016 tmsnrt.rs/2egbfVh
By Nigel Stephenson
LONDON, Dec 7 European shares followed Asian
stocks higher on Wednesday, buoyed by reports that Italy would
step in to rescue troubled bank Monte dei Paschi and by
expectations the European Central Bank would extend its
bond-buying stimulus scheme this week.
Wall Street was set to open slightly lower, according to
index futures , as world stocks
were on track for their longest winning streak
-- three days -- since mid-September.
Italian government bond yields fell, narrowing the premium
investors demand to hold them rather than benchmark German debt,
to its tightest for about a month.
The pan-European STOXX 600 index rose 0.7 percent
and Italy's FTSE MIB share index gained 1.5 percent,
hitting its highest for six months.
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Shares in Monte dei Paschi, Italy's oldest bank and the
focus of investor concerns over the country's banking sector,
rose 9 percent, and an index of Italian lenders'
shares rose 5 percent. The STOXX 600 banking index
hit its highest since January.
Reuters reported exclusively on Tuesday that Italy was
preparing to take a 2-billion-euro controlling stake in the bank
as prospects of a private funding rescue faded following Prime
Minister Matteo Renzi's decision to resign.
Sources said the government, the bank's largest shareholder
would buy junior bonds held by ordinary Italians. Buying the
bonds, convertible into shares, would raise the government's
stake to 40 percent from 4 percent.
Investors' concerns were that a defeat for Renzi in a
referendum on constitutional reforms could further undermine
faith in the European Union - following Britain's decision to
quit the bloc - as well as confidence in the euro currency.
Market reaction to Renzi's defeat and his resignations was
relatively muted, partly as a consequence of a pledge by the ECB
to buy Italian government debt if markets became unsettled.
"Despite the fact that the probability of early elections
has risen, the market is focusing on the banking sector and the
fact the government seems to be showing more urgency in dealing
with that problem," Mizuho strategist Antoine Bouvet said.
Italian 10-year government bond yields fell 8
basis points (bps) to 1.90 percent on Wednesday, having hit 2.17
percent in the run-up to the vote. Yields on German 10-year
debt, the euro zone benchmark, fell 2.5 bps to 0.35 percent.
The euro edged up 0.2 percent to $1.0733. It fell as
low as $1.0505 on Monday in reaction to the referendum before
hitting a three-week high the same day.
"People had gone into the referendum with a very pessimistic
view and I think the last five years have taught us that, as far
as the euro is concerned, political issues often don't have a
lasting impact," DZ Bank currency analyst Sonja Marten said.
The dollar index, which measures the U.S. currency
against a basket of six of its major peers, was marginally down
on the day. The yen fell 0.1 percent to 114.04 per
dollar, still close to a 10-month low.
Many market participants were looking to the ECB's policy
meeting on Thursday, at which it is widely expected to announce
an extension of its quantitative easing programme. Uncertainty
remains over whether the size of monthly purchases will be kept
steady or scaled back, and over whether it will send a formal
signal on the eventual end of the programme.
One of the biggest movers in the currency markets was the
Australian dollar, down 0.4 percent after data showed the
Australian economy shrank by 0.5 percent, its biggest
contraction since 2008, in the third quarter.
Australian stocks, however, closed 0.9 percent higher in
anticipation of more fiscal and monetary stimulus. While rate
futures <0#YIB:> imply scant chance of a Reserve Bank interest
rate cut in the coming months, prospects of a hike vanished.
MSCI's broadest index of Asia-Pacific shares outside Japan
rose 0.4 percent while Japan's Nikkei
added 0.7 percent. Chinese shares gained 0.7 percent.
China's foreign exchange reserves fell by more than expected
last month to $3.05 trillion, their lowest since 2011, the
central bank said.
The yuan currency last stood at 6.8850 to the dollar
, compared to a mid-point of 6.8808 set by the central
bank. The currency is down 5 percent so far this year.
Oil prices fell as investors questioned whether a deal to
cut output agreed last week by the Organization of the Petroleum
Exporting Countries (OPEC) and others would be enough to drain
that global glut that has pushed prices lower.
Brent crude, the international benchmark, fell 52 cents to
$53.41 a barrel.
(Additional reporting by Hideyuki Sano in Tokyo and John
Geddie, Jemima Kelly, Christopher Johnson in London; Editing by
Louise Ireland and Gareth Jones)