THE sharemarket rose nearly 1 per cent yesterday, buoyed by hopes that European leaders may be able to thrash out a deal on the region's debt crisis this week.
The local market spent the day in positive territory after Italy's new government announced a raft of austerity measures aimed at eliminating the country's budget deficit by 2013. They included ?17 billion ($22 billion) in new taxes, ?13 billion in public spending cuts and ?10 billion in measures aimed at boosting growth.
IG Markets' Chris Weston said the tough measures boosted hopes that debt-laden Greece might come up with similar measures ahead of a key euro zone meeting on Friday. "The Italians are coming out, guns blazing," he said. "Hopefully that should keep momentum in the bond market going in the right direction."
At the close, the benchmark S&P/ASX 200 Index was up 33.3 points, or 0.8 per cent, at 4321.3, while the All Ordinaries Index rose 33.2 points, or 0.8 per cent, to 4379.5.
Energy stocks got an extra boost as calls for tougher sanctions against Iran over its nuclear program boosted oil prices. Woodside Petroleum ended the session 1.6 per cent, or 53?, higher at $34.19, while Energy Resources of Australia was up 14? at $1.57. Aquila Resources was down 17? to $6.83.
Investors welcomed the proposed merger between Aston Resources and Whitehaven Coal. Aston rose 38? to $9.49, while Whitehaven gained 7? to $5.71.
BHP Billiton was up 61? at $37.26 and Rio Tinto rose 68? to $67.
Mr Weston said that markets remained cautious ahead of a Franco-German summit in Paris overnight and a key two-day European summit later this week.
Data from China showing the country's services sector posted its weakest performance in three months in November added to fears contagion from Europe may take its toll in Asia.
Mr Weston said another failure by European leaders to tackle the region's escalating debt problems could lead to markets plummeting.
"We've seen time and time again these comprehensive packages disappoint," he said.
The price of gold in Sydney closed at $US1744.88 per ounce, up US8?.