Europe stocks up on Portugal, ECB hikes

European shares rose on Thursday on hopes that Portugal's decision to seek financial aid could put a brake on the region's debt crisis and as the European Central Bank raised interest rates.

Wall Street looked set to open flat to slightly higher.

The ECB, as expected, raised rates by 25 basis points to 1.25%, wary of gathering inflation but confident that growth could take it despite the ongoing eurozone debt crisis.

It was the first rise since July 2008 and came a day after Portugal's caretaker government requested European Union aid at the urging of leading bankers, who wanted a bailout to help the economy and safeguard the country's banking system.

The pan-European European FTSEurofirst 300 stock index was up 0.2%.

Further contagion in the debt crisis was not being ruled out, but other countries that have been struggling, notably Spain, are less likely to be drawn in.

"We all knew Portugal was going that way, Spain looks like it is in a better position," said Will Hedden, sales trader at IG Index,

But he added: "It is a bit early to say everything stops with Portugal."

World stocks as measured by MSCI were weak with emerging markets stepping back from a sharp rally of the past few weeks to fall more than a quarter of a percent.

Japan's Nikkei closed up 0.07%, mainly due to short-covering in energy and domestic-demand stocks.

ECB ahead

The euro fell from an 11-month high against the yen and a 14-month peak versus the dollar ahead of the well-flagged move, partly on concerns that the ECB may not strongly signal a series of future hikes.

"The euro has rallied considerably on the ECB rate hike view but it may be the case of buy on the rumour, sell on the fact," said Koji Fukaya, chief FX strategist at Credit Suisse, explaining the day's moves.

The euro was at USD 1.4284 and 121.61 yen after the decision.

German government bond prices were lower on the day as were Portuguese 10-year bonds.