Published: Nov 10, 2011 6:45 PM EST
Updated: Nov 10, 2011 6:45 PM EST

LONDON (AP) - Stock markets stabilized Thursday after Greece's political leaders finally agreed on a new prime minister and as Italy's borrowing rates eased on speculation the European Central Bank has been buying up the country's bonds.
    
Fears that Italy, the No. 3 economy in Europe, could default on its $2.6 trillion debt had sent stock markets plunging Wednesday as Italy's key borrowing rate spiked way above the 7 percent threshold. Greece, Ireland and Portugal had to eventually seek outside financial help when their borrowing rates rose above that level.
    
However, speculation that a technocratic government led by economist Mario Monti is likely to replace Premier Silvio Berlusconi's government soothed market nerves, as have unconfirmed reports the European Central Bank bought Italian bonds to get their yields down. Italy's benchmark 10-year rate was at 6.91 percent, 0.22 of a percentage point lower on the day.
    
"While the ECB intervention has proven effective in the short-term ... the question is now whether the ECB can credibly protect yields from breaking again above 7 percent," said Sebastien Galy, an analyst at Societe Generale.
    
Tensions also eased on news that Italy easily sold €5 billion ($6.8 billion) in 12-month bonds at borrowing rates which were not as bad as expected. Investors asked for an interest rate of 6.087 percent to lend Italy 12-month money.
    
Though that's up sharply from 3.57 percent in the last such auction last month, it's well below analyst expectations of 7 percent. Demand for the bonds was almost twice the amount on sale.
    
Italy is under pressure to prove it can push through the reforms needed to convince investors it can repay its debts. The president pledged reforms will be passed soon, likely by Saturday, after which Berlusconi will resign.
    
"There may be some stability now, but this storm has barely begun," said Louise Cooper, markets analyst at BGC Partners. "Italy's fundamental problems remain."
    
The calmer tone in Italian bond markets helped most European markets, with Milan's main stock market outperforming its European peers to close 1 percent higher. Germany's DAX rose 0.7 percent to 5,867.81 while the CAC-40 in France slipped 0.3 percent lower to 3,064.84. The FTSE 100 of leading British shares shed 0.3 percent to 5,444.82.
    
In the U.S., the Dow Jones industrial average was up 0.9 percent at 11,891.14 while the broader Standard & Poor's 500 index rose 0.8 percent to 1,238.83.
    
The euro was also in demand, trading 0.5 percent higher at $1.3609.
    
As well as cautiously welcoming developments in Rome, investors have been cheered that Greece's political leaders agreed that former European Central Bank Vice President Lucas Papademos will lead an interim coalition government, that is tasked to secure continued bailout funding and a new €130 billion ($177 billion) rescue package from eurozone partners and the International Monetary Fund.
    
The hope is that his experience of global financial circles and his noninvolvement in the partisan politics of Greece will lend themselves to calm jittery markets and steer Greece to a semblance of stability.
    
Earlier in Asia, Japan's Nikkei 225 index fell 2.9 percent to 8,500.80 - a five-week closing low - and Hong Kong's Hang Seng dived 5.3 percent to 18,963.89.
    
Oil prices tracked equities in Europe higher - benchmark crude for December delivery was up $1.79 at $97.53 a barrel in electronic trading on the New York Mercantile Exchange.

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