Markets surge on hopes Europe will aid Greece

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Vague promises of European support for Greece sparked a big turnaround in battered financial markets Tuesday.

The Dow Jones industrial average was up 190 points, or 1.9%, to 10,097 at about 10 a.m. PST. The blue-chip index on Monday had fallen 104 points to a three-month low of 9,908, in part on fears that European government-debt woes would fuel another global financial crisis.

[UPDATE at 1:15 p.m.: The Dow closed up 150.25 points, or 1.5%, to 10,058.64.]

The euro currency, beaten down in recent weeks, has soared to $1.379 from $1.365 on Monday.

The action in stocks and the euro looked like a “short squeeze,” meaning that traders who had bet on continuing declines in those markets were buying to close out their positions.

Olli Rehn, the new European economic affairs commissioner for the European Commission, said the group was “talking about support in the broad sense of the word” for Greece. “I cannot specify it now,” Bloomberg News reported.

“Solidarity goes both ways,’’ Rehn said. “I am sure that in the next couple of days we will see discussion and decisions to this effect.”

Reuters reported that a senior German government official said that “a decision on help for Greece has been taken in principle within the euro zone.” The aid may be in the form of European Union-backed loan guarantees, the Wall Street Journal reported.

Expectations for a rescue package also were stoked after European Central Bank President Jean-Claude Trichet was said to have cut short a trip to Australia to attend a special European Union meeting in Brussels on Thursday.

There has been speculation in recent days that other European states would help Greece as it struggles to pare its soaring budget deficit. Assistance from the rest of Europe could calm bond investors, who in recent weeks have demanded ever-higher yields on Greek debt to compensate for fears of default.

Greece’s finances alone wouldn’t be a huge concern for Europe, but its troubles have spilled into other markets, raising the risk of financial “contagion.” Investors have sharply pushed up yields on Portuguese and Spanish government bonds as well in recent weeks, making it more expensive for those nations to borrow.

But yields fell sharply in Greece, Portugal and Spain on Tuesday. The yield on 2-year Greek government notes slid to 6.34% from 6.63% on Monday. Spanish two-year note yields fell to 1.95% from 2.16%.

-- Tom Petruno