Stock markets rose for a third day on Thursday and the euro steadied, helped by signs that euro zone leaders are committed to keeping Greece afloat for now.

European banking shares <.SX7P> recovered from an initial dip to gain 0.9 percent despite Swiss bank UBS reporting a 2 billion U.S. dollar loss caused by unauthorized trading by an employee.

Worries over the euro zone crisis and a global slide into recession have hammered shares since late July and there was little conviction this week's gains were anything other than just a breather.

Given the fact that we are not seeing much more than rhetoric at the moment, many people are still expecting Greece to default and see the move up as nothing more than a relief rally, Zahid Mahmood, trader at Capital Spreads, said.

French and German leaders urged Greece's prime minister in a conference call late on Wednesday to meet the terms of its new bailout and said they were determined to keep the country in the euro zone.

A Greek government official said afterwards that Athens looked set to get approval from EU and IMF inspectors for the issue of its next tranche of debt.

European stocks <.FTEU3> rose 1.15 percent in early trade, reflecting strong gains for all the major markets and a 1 percent closing gains for Wall Street overnight<.SPX>.

World stocks <.MIWD00000PUS> gained 0.6 percent, helped by Japan's Nikkei share average <.N225> closing 1.8 percent higher.

The euro traded virtually flat on the session.

CREDIT CRUNCH

European finance ministers have been warned confidentially of the danger of a renewed credit crunch as a systemic crisis in euro zone sovereign debt spills over to banks, according to documents obtained by Reuters on Wednesday.

The euro jumped to a 3-day peak of $1.3873 on Wednesday after the 25-minute telephone call between the leaders of France, Germany and Greece which boosted confidence that Athens will receive the next tranche of aid from the European Union and IMF and avoid imminent default.

The single currency's recovery has also been helped by European Commission President Jose Manuel Barroso flagging plans to present options soon for the introduction of common euro bonds, seen by many as a key tool to ease the crisis.

The project, however, is likely to meet stiff political resistance and potential legal challenges in Germany.

Many perceived safe-haven assets, including the dollar, U.S. Treasuries and Japanese government bonds (JGBs), remained in demand, underlining the brittle nature of the stocks rally.

German Bund futures reversed early losses on the report of the loss at UBS and as overnight borrowing at the European Central Bank jumped.

Stocks are catching up with the relief rally on Wall Street, but bonds are being supported too as investors fret over a possible rating cut to Italy and a Greek default, said a trader at a European bank.

Oil eased as rising fuel stocks and falling demand in top consumer the United States reinforced views that slowing economic growth and Europe's debt crisis would dent energy use.

Brent crude edged down 0.2 percent to just over $112 a barrel, while U.S. crude lost 0.34 percent to $88.58.

(Additional Reporting by Atul Prakash)

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