London (AFP) - European stock markets broke into gains on Wednesday, on expectations that US lawmakers would avoid a disastrous default just hours ahead of a deadline.
Sentiment was rattled early in the session as ratings agency Fitch placed the United States on warning for a downgrade from its top-level AAA assessment.
But at close in Europe, Frankfurt's DAX 30 climbed 0.47 percent to set a new record close at 8,846.0 points.
London's benchmark FTSE 100 index added 0.34 percent to 6,571.59 points, while the CAC 40 in Paris rose 0.29 percent to 4,243.72 points.
"Europe's markets moved sharply from losses to gains, gyrating wildly on news flow from Capitol Hill as the 17th October deadline edges into view," said Michael Hewson, Senior Market Analyst at CMC Markets UK.
The United States on Wednesday stood hours from a fateful fiscal deadline, with a chaotic political standoff threatening to trigger a debt default and rock the global economy.
But late in the trading session, it appeared Republican and Democratic leaders in the US Senate had struck an agreement.
Senate Majority Leader Harry Reid and Mitch McConnell, the top Republican in the senate, led the negotiations to avert a default after an earlier bid collapsed in a bitterly divided House of Representatives.
Wall Street soared on talk of the deal with the Dow Jones Industrial Average up 1.27 percent in midday trade and the Nasdaq gaining 1.10 percent
But Senate approval of the deal still would have to be ratified by the Republican-controlled House, where a core Tea Party faction has until now vehemently resisted compromise.
The fast-moving developments in Washington sent the European single currency tumbling, falling to $1.3488, compared with $1.3525 late in New York on Tuesday.
Hours earlier, Asian equities closed mixed when doubts were still strong that Congress would eventually reach an agreement.
Hong Kong stocks fell 0.46 percent, Shanghai dipped 1.81 percent and Seoul lost 0.31 percent, while Sydney closed flat and Tokyo rose 0.18 percent.
Fitch warns on 'brinkmanship'
If Congress does not raise the $16.7-trillion debt ceiling in time, the US Treasury would begin to run out of money to meet all US obligations and slip towards a historic default.
Economists have warned that such an outcome would have devastating effects on the global economy and on world financial markets.
Fitch warned it would downgrade the US debt rating from its highest level, citing the possibility the Treasury could default on its obligations.
"The US authorities have not raised the federal debt ceiling in a timely manner," it said.
"Although Fitch continues to believe that the debt ceiling will be raised soon, the political brinkmanship and reduced financing flexibility could increase the risk of a US default."
In France meanwhile, a number of companies saw their shares fall sharply.
Shares in food group Danone fell by 2.28 percent in response to figures for the cost of a food recall in Asia.PSA Peugeot Citroen shares fell by 4.43 percent on weak sales in September, LVMH luxury group stock fell 4.25 percent on disappointing quarterly sales, and Ubisoft stock plunged 26.15 percent on a delay in the launch of two new computer games.