(Reuters) - European stocks jumped and the euro recovered from week lows on Wednesday after official data showed an unexpected expansion in China's powerful factories in January and the first growth in German manufacturing in four months. Overall the data remained relatively grim, with crumbling demand in Europe holding back more buoyant economies in Asia. But some of the key numbers were better than feared, and that positive added to hopes that Greece is edging towards a comprehensive deal on restructuring its debt to ease markets' nerves at least for a moment. "The good Chinese data is definitely helping the market," said Veronika Pechlaner, a fund manager on the Ashburton European equity fund. China's official purchasing managers' index showed the factory sector expanded slightly in January and the separate indicator from bank HSBC contracted the least in three months. While euro zone manufacturing activity declined for a sixth straight month in January, there was a clear upturn in the German index that also bettered an initial flash estimate. That helped European shares gain 1.25 percent to 1,049.96 points, adding to strong gains of nearly 5 percent in January, with banks the best performing sector. "The core European numbers are more or less in expansionary territory," said Peter Dixon global equities economist at Commerzbank. "Germany continues to motor on and show a reasonable amount of dynamism and that will drag France along and maybe Italy but it is not really going to help the likes of Greece that much and Portugal and maybe Spain will struggle." The MSCI world equity index, which has enjoyed a strong start to the year, seeing a rise of nearly six percent in January, was up 0.4 percent at 316.4. GREEK DEAL Greece, which is mired in debt structuring talks in a desperate bid to get a second bailout package and avoid a messy default, saw a record drop in production for January and a sharp decline in new orders, which could lead to more job losses. But investors are increasingly hopeful the talks will provide a deal that eases concerns of a chaotic, uncontrolled default which would ripple through the banking sector and debt markets. Helped by resistance around the psychological 1.30 level against the dollar, the euro erased early losses after the PMI data to be modestly firmer around the $1.31 level. The dollar also fell to its lowest in three months against the yen, sparking concerns the Japanese authorities may step in, as traders adjusted positions to reflect the Federal Reserve's pledge to keep interest rates near zero until late 2014 which left the door open to more quantitative easing. Yields on U.S. Treasuries have fallen sharply since the Fed statement, with the five-year note near levels not seen since at least the 1960s. Germany continued to see good demand for its debt despite low yields, selling just over 4.0 billion euros of new 10-year bonds at an average yield of 1.82 percent, down from 1.93 percent at a similar auction last month. That reflects Bunds status as a safe haven from the broader euro zone crisis although yields on riskier 10-year Italian debt broke below 6.0 percent to around 5.8 percent in morning trade. In oil markets Brent crude rose above $111 a barrel, gaining for a second straight session, on fears that tensions between Iran and the West may escalate with U.S. lawmakers mulling more sanctions on Tehran, while the China manufacturing data also supported sentiment. (Additional reporting by Jessica Mortimer in London and Chikako Mogi in Tokyo; editing by Patrick Graham)

Source