Stocks rebound as EU confidence grows

Stocks rebounded from their two-year low at the open after European and US markets rallied on speculation European leaders would employ fresh measures to counter the Greek debt crisis and avert a global recession.

To the surprise of sceptics, the market extended the gains to the close, which CityIndex chief analyst Peter Esho said was a "strong signal" the market had bottomed from last week's severe losses.

By the close, the benchmark S&P/ASX 200 Index had gained 140.7 points, or 3.6 per cent, to 4004.6.

CMC Markets trader Ben Taylor said investors were confident a resolution of the European debt crisis was drawing near, before a German vote.

Media reports suggested European Union policymakers had plans to use the EU rescue fund to recapitalise vulnerable euro-zone banks.

"The proposed asset relief idea should give euro banks the chance to discard some of their bad investments and raise capital to suitable levels," he said.

Mr Taylor said he expected investors to push money back into the markets over the next fortnight.

Materials, which closed 3.9 per cent lower on Monday, were the strongest performing stocks, with the sector rising 4.95 per cent.

Rio Tinto gained $3.22, or 5.4 per cent, to $63.42 after it bought several iron ore deposits in the central Pilbara for $32 million, while BHP Billiton rose $1.40, or 4.1 per cent, to $35.35.

Mr Esho said materials stocks looked to be bottoming as silver and gold prices bounced back from last week's lows.

Newcrest Mining, which was the worst performer among the top 50 companies on Monday, rose $1.56, or 4.8 per cent, to $34.42.

Gold closed in Sydney at $US1650.72 an ounce, up $US83.90 from Monday.

The local financial sector gained 4.3 per cent, with all the big retail banks ending the day more than 5 per cent higher, except Commonwealth Bank, which closed up 3.9 per cent at $45.55. Westpac gained $1.06, or 5.5 per cent, to $20.25 after cutting the interest rates on several fixed-rate home loans, as expectations of a Reserve Bank rate rise weakened.

Rare-earths minerals explorer Lynas Corporation was the strongest stock of the ASX's top 100, soaring 34.9 per cent to $1.18. Building materials company CSR was the worst-performing stock among the top 100, shedding 1.3 per cent to $2.29.