Europe stocks recover after German auction, IMF

Reuters A man sells salepi beverage during the first day of the official sales season at a commercial street in Athens on Jan. 16. Greek talks with creditors resumed Wednesday.

LONDON (MarketWatch) � Most European stock markets closed slightly higher Wednesday after a choppy session, with Greek shares rising as negotiators got back to the table trying to round out a crucial deal with the nation�s creditors.

The pan-European Stoxx 600 index XX:SXXP �closed 0.1% higher at 253.48, after see-sawing between gains and losses throughout the trading session.

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Stocks have rallied 20% since October lows, based on intraday levels. But investor sentiment also has gained, and that's a bad sign for contrarian investors. (Photo: Getty Images)

The Greek FTSE/ATHEX 20 index GR:FTASE �jumped 2.8% to 260.84, as the government resumed talks with bondholders to discuss a voluntary write-down on the country�s sovereign debt. The talks stalled Friday, but a deal is necessary for Greece to receive its next tranche of bailout funds.

Prime Minister Lucas Papademos said ahead of the meeting that he would consider forcing a massive private-sector haircut on the debt if a deal can�t be reached, according to a New York Times interview published Wednesday.

Even with a deal, however, Greece is still likely to face a default down the road, analysts at FxPro said. The situation depends on how Greek banks respond to the pressure they�re under and on any upfront payment demanded by private-sector bondholders, the analysts said in a note.

�Combined with the current fragility of the talks, this means that there remains a decent chance that Greece will default before the end of the current quarter,� they wrote.

Stocks had spiked in midday trading as reports surfaced that the International Monetary Fund would propose expanding its lending fund to $1 trillion in a bid to protect the global economy from the euro-zone debt crisis. The Washington-based IMF confirmed the report. Read more.

�Although we have been cautious of recent economic data surprising to the upside this news from the IMF could be a short-term catalyst to push this market higher,� said Atif Latif, director of trading at Guardian Stockbrokers.

However, stocks pulled back in late trading as investors had time to digest the IMF proposal.

�The first reaction was positive, but the market�s second reaction was: �Do we need all this extra cash? Are we going to bail out more countries?� � said Predrag Dukic, senior equity salesman at CM Capital Markets in Madrid.

Successful debt sales provide a lift

Also lending support for the European market, the German government sold �3.44 billion ($4.4 billion) of two-year bonds at an average yield of 0.17%, close to a record low, according to media reports.

The German DAC 30 index DX:DAX �gained 0.3% to 6,354.57, led by a 2.9% gain for Infineon Technologies AG DE:IFX �and as shares of Henkel AG & Co. KgaA Pfd. DE:HEN3 �added 2.4%.

In Portugal, the government sold �2.5 billion in short-term debt with borrowing costs declining slightly, according to media reports.