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LONDON, Feb 22 AFP

February 23 2013, 04:31AM

European stock markets have rebounded with the euro sliding against the dollar and traders welcoming improving economic fortunes in Germany and looking ahead to weekend elections in indebted eurozone nation Italy.

London's FTSE 100 index of leading companies added 0.70 per cent to close at 6,335.7 points, while Frankfurt's DAX 30 rose 1.03 per cent to 7,661.91 points, and in Paris the CAC 40 jumped 2.25 per cent to 3,706.28 points.

Milan advanced 1.40 per cent to 16,233 points.

Equities had fallen on Thursday over concern about a possible end to US stimulus measures and slumping business activity across the eurozone.

"European equities managed to reverse losses and are rallying nicely now," said Gekko Global Markets trader Anita Paluch.

"And while the Italian elections are still ahead of us, with Friday being the last trading session before the voting, welcoming news came out of Germany."

A contraction in the German economy at the end of last year was a hiccup, analysts said on Friday, as data showed business confidence in Europe's economic powerhouse soaring this year.

The federal statistics office Destatis confirmed an earlier estimate that German gross domestic product (GDP) contracted by 0.6 per cent in the final quarter of 2012, weighed down by a two-per cent slump in exports.

Nevertheless, a whole range of experts - from analysts to economic think tanks, the government and even the Bundesbank -- are convinced that the dip in growth will prove only temporary and GDP will start growing again as early as the first quarter of 2013.

Economic sentiment in Germany could hardly be better.

Earlier this week, the key ZEW barometer of investor confidence rose to levels last seen before the start of the three-year-old debt crisis.

And on Friday, the even more closely watched Ifo business climate index notched up its strongest gain in two and a half years to hit its highest level since April 2012.

"The German economy is regaining momentum," said Ifo president Hans-Werner Sinn as his institute's index jumped by 3.1 points to 107.4 points in February.

But the eurozone as a whole faces another full year of recession in 2013, as millions more people living across the region become unemployed, the European Commission said on Friday.

Economic output is set to shrink by 0.3 per cent after a 0.6-per cent contraction last year, the EC said.

It meanwhile predicted that the unemployment rate across the 17-state currency area would hit 12.2 per cent for 2013, up from 11.4 per cent last year -- which could take the number of unemployed people in the eurozone above the 20-million mark.

Italy was meanwhile poised to hold its most important elections in a generation starting on Sunday, as financial markets warned an unclear outcome could plunge the eurozone's third economy back into crisis.

"There is no doubt that investors are exercising a degree of caution ahead of this week's Italian election, with the possibility that we could well see a lot of political grid lock come into play early next week," said CMC Markets analyst Michael Hewson.

Italians will cast their ballots as they grapple with the longest recession in two decades and several rounds of austerity cuts.

The most likely outcome is a centre-left government led by Democratic Party leader Pier Luigi Bersani, a cigar-chomping former communist who now espouses broadly pro-market economic views.

In European corporate action, shares in Volkswagen plunged nearly 7 per cent to 163.80 euros after net profit came in lower than expected.

Nevertheless Europe's biggest carmaker said its net profit zoomed ahead by more the 40 per cent last year to a record 21.7 billion euros ($A28.15 billion) on a 12.2 per cent increase in sales to 9.276 million vehicles.

The European single currency drifted down to $US1.3165 from $US1.3188 late in New York on Thursday. The dollar rose to 93.37 yen from 93.11 yen.

Gold prices edged down to $US1,576.50 an ounce on the London Bullion Market from $US1,577 on Thursday, when the precious metal also struck a seven-month low point of $US1,555.55.

US stocks moved higher, boosted by the bullish report on German business sentiment as well as solid earnings results from computer company Hewlett-Packard.

The Dow Jones Industrial Average was up 0.45 per cent to 13,942.60 points in midday trading.

The broad-based S&P 500 advanced 0.46 per cent to 1,509.36 points, while the tech-rich Nasdaq Composite Index rose 0.47 per cent to 3,146.35 points.

Asian markets were mixed on Friday among bargain hunting. Tokyo ended up 0.68 per cent, Sydney jumped 0.76 per cent, and Seoul added 0.18 per cent.

Shanghai ended down 0.51 per cent and Hong Kong lost 0.54 per cent.