LONDON -- Markets retained their optimistic tone Tuesday even though U.S. leaders have yet to thrash out a budget deal that could prevent recession in the world's largest economy and despite ongoing concerns over Italy's political and economic future.
However, the longer a U.S. deal to avoid the so-called fiscal cliff of automatic tax increases and spending cuts at the start of next year fails to emerge, the more fidgety investors are likely to become.
Coupled with concerns over upcoming Italian elections and their impact on the country's efforts to tackle its financial crisis, the outlook in the markets has the potential to turn around sharply.
"The fiscal cliff and European sovereign debt situations remain lurking in the wings and could well provide some quick price action if we see any developments," said Fawad Razaqzada, market strategist at GFT Markets.
In Europe, the FTSE 100 index of leading British shares was up 0.1 percent at 5,926, while Germany's DAX rose 0.5 percent to 7,566. The CAC-40 in France was 0.5 percent higher at 3,631.
Wall Street was poised for a steady opening after modest gains Monday, with Dow futures and the broader S&P 500 futures up 0.1 percent.
As has been the case for much of the period since President Barack Obama won re-election early last month, the gaze of U.S. investors remains on whether he and Congress can agree to a budget deal to avoid the fiscal cliff that many economists think would tip the U.S. back into recession.
"Like the debt ceiling drama of 2011 investors expect the fiscal cliff debate to run to the wire, but overwhelmingly believe a solution will be found," said Mike McCudden, head of derivatives at Interactive Investor.
Alongside the discussions over the U.S. budget, investors are keeping a close watch on developments in Italy following the surprise weekend announcement by Italian Prime Minister Mario Monti that he will resign after Italy's 2013 budget has gone through Parliament.
Monti, a technocratic leader who has been credited with restoring confidence in Italy's economy, said he found it impossible to lead after former Prime Minister Silvio Berlusconi's party, Parliament's largest, dropped its support for the government.
Analysts fear Monti's unexpected resignation could spark a new round of Italian political turmoil and slow efforts to get one of Europe's largest economies back in shape. That prompted a big spike in Italy's borrowing costs Monday as well as falls on the Milan stock exchange.
Some calm appeared to have been restored Tuesday, with the yield on Italy's 10-year bonds down 0.03 percentage point at 4.58 percent and the FTSE MIB in Mila up 0.7 percent.
The euro was also solid, trading 0.2 percent higher at $1.2970.
Earlier, markets in Asia appeared to take in stride news that HSBC, the British banking giant, will pay $1.9 billion to settle a money-laundering probe by federal and state authorities in the United States. HSBC shares rose 0.3 percent in Hong Kong and fell 0.3 percent in London.
Japan's Nikkei 225 index fell 0.1 percent to 9,525.32, with Japanese utilities coming under pressure a day after a team of geologists said that a nuclear power plant in western Japan is likely located on an active fault. Japanese guidelines prohibit nuclear facilities above active faults.
Hong Kong's Hang Seng rose 0.2 percent to 22,323.94 but shares in mainland China fell, with the main Shanghai index closing 0.4 percent lower at 2,172.50.
Oil prices tracked equities higher, with the benchmark New York rate up 27 cents at $85.83 a barrel.