By Nina Bains & Andrea Tryphonides European stocks rallied, the euro pushed higher against the dollar, and demand for German Bunds fell as financial markets welcomed the results of Spain's bank stress tests, but investors remained watchful as the threat of a sovereign downgrade hung over Spain. By mid-morning, the benchmark Stoxx 600 index was up 0.9% at 270.84, Germany's DAX was 1.2% higher at 7304.42 and France's CAC-40 was up 1.4% at 3401.56. Spain's Ibex 35 was up 0.7% at 7761.10 and Italy's FTSE Mib was 1.7% higher at 15,348.44. Greece's ASE Composite added 0.5% to 743.16. Investors cheered a slight upward revision in euro-zone manufacturing data, but analysts remained more cautious. The euro-zone purchasing mangers index for manufacturing was revised higher in September to 46.1 from a flash reading of 46.0. Though above August's 45.1 level, it is still far below the 50 breakeven level. "This is the second month in a row that the euro-zone aggregate figure improved, although from quite low levels," said Evelyn Herrmann, European Economist at BNP Paribas. "Italy's manufacturing PMI posted the biggest improvement to 45.7 in September, up 3.1 points and beyond market expectations of a more moderate improvement." Manufacturing data for the U.K. were more downbeat. The PMI for the manufacturing sector fell to 48.4 in September from August's 49.6, in line with expectations. Financial markets shrugged off the release, with the U.K.'s FTSE 100 index remaining firm, up 1% at 5799.25. December gilts were little moved on the data and were 39 ticks lower at 120.23. Sterling was fetching $1.6143 from $1.6167 late Friday in New York. Meanwhile, the number of people out of work in the euro zone climbed further in August, hitting a record high: 18.196 million people were without jobs in August, an increase of 34,000 from the previous month, while the jobless rate was at 11.4% of the workforce, as expected. "While euro-zone unemployment rose to a new record high in August, the rate of increase was at least the smallest since April 2011," Howard Archer, chief U.K. and European economist at IHS Global Insight said. Banks gained, with the Stoxx Europe 600 for the sector up 1.1%, with Italy and Spain's financial institutions performing well after the results of Spain's bank stress tests. Santander rose 1.1%, Banco Bilbao Vizcaya Argentaria added 0.4%, UniCredit advanced 1.9% and Intesa Sanpaolo was up 1.6%. The independent assessment showed that of 14 Spanish banks subjected to the tests, seven would need further capital amounting to 59.3 billion euros ($76.3 billion), which was slightly lower than consensus expectations. While the results of Spain's bank stress tests--which were released after European equity markets closed Friday--were largely well received, investors were also waiting for Moody's Investors Service's decision on Spain's credit rating that may come later Monday. Moves in the bond markets of the euro zone's most shaky economies were more muted. Spanish and Italian yields eased a touch. Spain's 10-year government bond yield was down 0.07 percentage point at 5.85% and Italy's equivalent yield was 0.02 percentage point lower at 5.07%, according to Tradeweb. Spain's Banco Popular Espanol sank 12% after trading resumed on the stock following a suspension. Spain's stock market supervisor had suspended trading in shares of Banco Popular following the bank's announcement that it planned to conduct a capital increase of up to EUR2.5 billion. In London, shares of miner Xstrata increased 3.1% after its board recommended that its shareholders vote in favor of the revised merger proposal from Glencore International. Glencore has offered 3.05 of its shares for every Xstrata share, up from 2.8, and wants its chief executive Ivan Glasenberg to head the combined company. Glencore shares were up 0.9%. In the foreign exchange markets, the euro was at $1.2897 against the dollar, up from $1.2859 late Friday in New York, and the dollar was at Y77.97, up from Y77.95. Spot gold was trading $0.90 lower at $1769.60 a troy ounce, while November Nymex crude oil futures were off $0.40 at $91.79 a barrel. The November Brent oil contract was down $0.65 at $111.74. December Bunds were 41 ticks lower at 141.36. At the same time, the Dow Jones Industrial Average front-month futures contract was up 0.5% at 13,421.00 and the S&P 500 futures contract was 0.4% higher at 1440.10. U.S. ISM manufacturing data for September are due at 1400 GMT. Write to Andrea Tryphonides at andrea.tryphonides@dowjones.com or Twitter: @ATryphonides

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