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LONDON, Dec 18, 2012 (AFP)

December 19 2012, 05:10AM

Europe's main stock markets have climbed as investors welcomed signs of progress in talks on a new deficit-cutting budget to avoid the so-called fiscal cliff in the United States, dealers said.

At closing, London's benchmark FTSE 100 index of leading shares rose 0.40 per cent to 5935.9 points, Frankfurt's DAX 30 added 0.64 per cent to 7653.58 points, while in Paris the CAC 40 was 0.14 per cent higher at 3648.63 points.

Milan's FTSE Mib index added 0.94 per cent to 16,155 points, as a key budget vote was delayed to Wednesday, while Madrid's IBEX 35 gained 0.95 per cent to 8117.0 points.

On the secondary bond markets the 10-year benchmark yields for crisis struck Spain and Italy eased on improved investment sentiment towards eurozone risk.

The European single currency rose to $1.3224, up sharply from $1.3161 late in New York on Monday. Gold prices slumped to $US1694 ($A1,612.80) an ounce on the London Bullion Market, from $1695.75.

US stocks also moved higher on Tuesday amid signs of progress to avert the "fiscal cliff," the potential for automatic tax increases and spending cuts on January 1 that could send the US economy into a slump.

In midday trade, the Dow Jones Industrial Average was up 0.57 per cent, the broad-market S&P 500 points gained 0.82 per cent, while the tech-rich Nasdaq Composite climbed 1.07 per cent.

"The market appears taken with the idea that new proposals are at least being advanced by both sides that differ from prior versions, suggesting last week's stalemate in the negotiation process has ended," said Briefing.com's Patrick O'Hare.

In company news, Rolls-Royce shares rallied 2.39 per cent to 880 pence in London after it confirmed a $1-billion contract with Japan's Skymark Airlines for Trent 900 engines to power six Airbus A380 aircraft.

Shares in Airbus-maker EADS shot up 2.59 per cent to 29.87 euros also boosted by an order by Turkey's Pegasus Airlines for 100 A321neo passenger jets.

Embattled French carmaker PSA Peugeot Citroen soared 4.69 per cent to 5.87 euros ($A7.38) after it was announced former EADS chairman Louis Gallois was joining the board to represent the French government which has agreed to rescue the company's financial arm.

Asian equities mostly rose on Tuesday, taking a lead from Wall Street as dealers grow confident US politicians will reach an agreement.

Politicians are seeking to break the deadlock and avert automatic taxation hikes and spending cuts that are due to come into effect on January 1 in the United States.

Experts fear that the fiscal cliff package, estimated to represent $600 billion, could tip the world's biggest economy back into recession.

Any indication that there is some movement in the budget negotiations and that the two parties are making an effort to find a solution "is enough to keep markets moving higher," said ETX Capital trader Markus Huber.

President Barack Obama hosted top Republican politician John Boehner in the White House for 45 minutes on Monday in the latest effort to avert a potentially disastrous deadlock.

The meeting follows news that Boehner had changed his position on not allowing any more taxes, saying at the weekend that he would agree to some hikes for people earning more than $1 million.

Originally Obama insisted higher taxes kick in for households earning more than $250,000, but has since offered to increase the threshold to $400,000.

Boehner said on Tuesday he would introduce a bill extending tax breaks for all Americans making under $1 million, a Republican fall-back strategy in the event a budget deal falls through.

Analysts say the development shows the outline of a tentative deal is being formed.

Continued weakness of the yen helped send Japanese shares surging for a second straight session as Shinzo Abe prepares to take over as prime minister, vowing to press a more aggressive policy of monetary easing.

Tokyo rose 0.96 per cent and Seoul was up 0.51 per cent, while Sydney added 0.48 per cent.

Shanghai increased by 0.10 per cent, while Hong Kong gave up earlier gains to end flat.

The election of Abe and his Liberal Democratic Party on Sunday was widely expected and investors now expect the Bank of Japan to unveil a further loosening of monetary policy at the end of its two-day meeting on Thursday.

In Tokyo share trading, utility giant TEPCO, which runs the Fukushima plant at the centre of last year's nuclear crisis, surged 17.32 per cent on expectations the new government will shelve any short-term plans to ditch atomic power.