European stocks and the euro rose on Wednesday, on optimism policymakers will take major steps at a summit this weekend to solve the festering debt crisis and offsetting the impact from a cut to Spain's sovereign credit rating.

German Bund futures were lower as safe-haven government bonds were sold off on a report in Britain's Guardian newspaper that France and Germany had agreed on a deal to increase the euro zone bailout fund's firepower by five fold.

The reported agreement was later denied by two senior European Union officials.

Nevertheless, the FTSEurofirst 300 <.FTEU3> index of top European shares was up 0.6 percent at 968.32 points while world stocks as measured by the MSCI index <.MIWD00000PUS> were up 0.5 percent at 300.23.

It's interesting that despite the denial the market still wants to go higher, which implies the market does think there's something in the pipeline, Jeremy Batstone-Carr, strategist at Charles Stanley, said. We'll see more whipsawing in the market in the run-up to Sunday.

Investors were still cautious about the degree of progress policymakers will make at an EU summit on Sunday.

German Chancellor Angela Merkel said the meeting would be an important step, but warned one summit would not be enough to resolve the crisis.

Indeed, U.S. banks' earnings underscored the damage inflicted by the euro zone uncertainty and the financial market turmoil, with Goldman Sachs Group Inc posting its second quarterly loss as a public company on Tuesday.

SPANISH RATING CUT

Moody's, one of the big three ratings agencies, on Tuesday cut Spain's sovereign ratings by two notches, saying high levels of debt in the banking and corporate sectors leave the country vulnerable to funding stresses.

That followed a statement by Moody's on Monday saying that it would scrutinize its stable outlook on France's triple-A credit rating.

Despite the downgrade, the cost of insuring against a Spanish default fell 11 basis points to 368 basis points, according to monitor Markit. Italian CDS prices narrowed 14 basis points to 435 basis points.

The euro recovered earlier losses made on Moody's downgrade of Spain and rose 0.5 percent to above $1.38. The dollar index <.DXY>, which measures the U.S. currency against six major currencies <.DXY>, was down 0.36 percent.

If the euro goes up $1.39 it could increase the downside risks, said Marcus Hettinger, currency strategist at Credit Suisse, adding that he expected the euro to hover in a $1.35-1.40 range in the near- to mid-term.

(Additional reporting by Naomi Tajitsu and; Brian Gorman in London; Editing by Anna Willard)

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