Stocks rebound as bond insurer fears ease

US and European stocks rose on yesterday, recovering from early losses, after a U-turn in shares of troubled bond insurers and financial firms offset fears about the effects of a slowing US economy.

Investors who had flocked to safe-haven US Treasuries earlier in the session promptly reversed course as stocks rose, crimping some gains in this market, though the price of oil fell more than two per cent on fears of a looming US recession.

Shares of MBIA Inc, the world's largest bond insurer, jumped 8.5 per cent to $15.15, erasing early losses, as the company's chief executive officer said rating agency Standard & Poor's has indicated that MBIA's capital plan is sufficient to maintain its triple-A credit rating.

The Dow Jones industrial average was up 88.77 points, or 0.71 per cent, at 12,531.60. The Standard & Poor's 500 Index was up 9.66 points, or 0.71 per cent, at 1,365.47. The Nasdaq Composite Index was up 15.58 points, or 0.66 per cent, at 2,364.58.

In Europe the FTSEurofirst 300 index of top European shares closed 0.10 per cent higher, with Britain's FTSE 100 up 0.7 per cent. Financial shares closed mostly lower, led by UBS after Switzerland's banking watchdog said UBS and rival Credit Suisse could face more write-downs.

Both banks, however, finished off earlier lows, and gains in top mobile phone maker Nokia and chemicals maker BASF helped markets end higher.

Earlier, Japan's Nikkei managed to squeeze out a 1.9 per cent gain on the day but ended the month down a whopping 11.2 per cent - its worst monthly performance in nearly eight years.

But investors and analysts remain worried about more troubles for US bond insurers and financial firms.

"The fear of the unknown continues to dominate the markets," said Andy Brenner, a market analyst at MF Global. "It is now a foot race between investors into the monolines and the potential downgrades."