Spanish prime minister Mariano Rajoy has opened the way to further tax rises and spending cuts, Reuters has reported.

The country will publish updated economic forecasts and a new programme of reforms on Friday and Rajoy said in a press conference:

We will not announce spending cuts like those we put out last year although we will likely need to review some entries in the budget.

We don't want to increase value added tax or income tax this year, but we also depend on the growth rate and the deficit-cutting path for the next years.

He also wants to introduce measures to promote growth.

And on that it's time to close up for the evening. Thanks for all your comments and we'll be back again tomorrow to follow all the latest developments.

It's been a buoyant day for European stock markets, with traders pointing to a number of factors for the gains. For a start, the poor manufacturing data, particularly from Germany, encouraged the belief that the European Central Bank could cut interest rates, possibly as soon as next week.

EC president Jose Manuel Barroso's comments that austerity may have reached the limits of public acceptance - albeit running into a dispute about what he actuallly meant – also encouraged investors.

On top of that came some good corporate results from the likes of chipmaker Arm in the UK and Netflix in the US. So here's the scores on the doors:

• The FTSE 100 finished 125.50 points or 2% higher at 6406.12, its biggest one day rise since 2 January

• Germany's Dax jumped 2.41%

• France's Cac climbed 3.58%

• Italy's FTSE MIB added 2.93%

• Spain's Ibex closed up 3.26%

Meanwhile the Dow Jones Industrial Average is currently up just over 1%.

The prospect of an ECB cut sent the euro as low as .2971, with the currency currently down 0.44% at .3009. Spanish bond yields dipped to their lowest level since November 2012, encouraged by a positive treasury bill auction. Hopes of a resolution to the impasse since the Italian elections helped push the country's yields below 4% to 3.937% at the moment.

Italy could potentially have a new government in place by the weekend if president Giorgio Napolitano's talks aimed at naming a prime minister succeed.

But while there is some optimism a new government can be formed quickly, there may still be stumbling blocks. The favourite at the moment to step in and head a coalition government of the rival centre-left and centre-right parties is former prime minister Giuliano Amato.

But the Northern League party said it would not be in any government headed by Amato or technocrat Mario Monti.

And Silvio Berlusconi's centre-right People of Freedo party said it had no objections to another potential candidate for prime minister, Matteo Renzi, the centre-left mayor of Florence. However Reuters reported that Renzi had played down the possibility:
It's the hypothesis which is most surprising and least probable, I don't think it's on the table.

Spain's economy shrank by 0.5% in the first three months of the year, continuing the country's recession.

The Bank of Spain blamed the fall on a drop in consumer spending, which was down 0.8% in the quarter. The Bank has forecast the economy will contract by 1.5% this year before returning to growth in late 2014.

As reported earlier, Spain successfully sold €3bn worth of short-term debt at lower yields.

Some reasonable housing data from the US but more downbeat manufacturing figures.

First, sales of new single family homes rose 1.5% in March to 417,000 after a 7.6% drop in the previous month. This was a little short of forecasts of a rise to 420,000. But sales were up 18.5% year on year, a good indication of how the housing market has been recovering. Annalisa Piazza at Newedge Strategy said:

In a nutshell, the US housing market remains on a moderate upward trend, also supported by falling mortgage rates and less restrictive credit conditions.

But following a worse than expected US purchasing managers index earlier , the Richmond Federal Reserve index showed a contraction in April, down 6 compared to a rise of 3 in March.

None of this has prevented stock markets – in the UK, Europe and the US – from roaring away. In Europe it seems to be the so-bad-it's-good syndrome, with poor figures (from Germany in particular) prompting talk of an interest rate cut from the ECB.

Wall Street has been lifted by a number of reasonable corporate results, including Netflix and Travelers, as well as the housing data.

Italy faces risks to its economic growth forecasts, an official from the country's cental bank has said.

Reuters is reporting Daniele Franco as saying that there were downside risks to the forecasts of a 1.3% decline in GDP in 2013 and a 1.3% rise in 2014.

He added that any new government – which we are still waiting for of course – must avoid any doubts over whether it would respect the 3% of GDP deficit limit.

Meanwhile there is this comment from Eurogroup head Jeroen Dijsselbloem:

US manufacturing grew in April at its slowest pace for six months, with the lates PMI survey coming in below expectations.

The Markit report showed the purchasing managers index fell to 52 from 54.6 in March, less than the forecast 54. It indicates that US manufacturing may be losing its momentum as consumers worry about tax hikes and government spending cuts.

Meanwhile the newest member of the Bank of England's monetary policy committee has been sounding an optimistic note on the UK economy.

Growth will pick up pace this year, according to Ian McCafferty, who has sought to play down fears the country has slipped into an unprecedented triple-dip recession. My colleague Katie Allen writes:

McCafferty said improving credit conditions, a brighter international outlook and his expectations of a recovery in business investment all made him “hopeful for the UK economy through 2013 and into 2014”.

“Overall, I am hopeful for a modest pickup in growth as some of the negative factors that have made the last couple of years so difficult start to fade, and as levels of confidence, so badly battered by the impact of the euro crisis, start to heal,” he said in a speech at the Coventry and Warwickshire Chamber of Commerce.

Speaking ahead of official GDP data due on Thursday that is expected to show the UK has just escaped a triple-dip recession, McCafferty’s comments gave George Osborne a much needed boost after a difficult 10 days during which he was warned by the IMF’s chief economist, Olivier Blanchard, that he was “playing with fire” by sticking to his strategy of public sector cuts.

The Barroso comments continue to stir things up. German politician Norbert Barthle has apparently condemned the reported comments from EC president José Manuel Barroso saying Europe's austerity programme had reached the limits of public acceptance:

Growing talk of a rate cut by the European Central Bank, perhaps as early as next week, continues to lift eurozone debt.

With Germany's private sector shrinking for the first time in five months, the country's bund futures are moving higher and the 10-year yield is down nearly 1 basis point at 1.215%.

But peripheral debt is also performing well, with Italian yields down 12.5 basis points and Spanish yields 21 basis points lower. The hope of a resolution to the political uncertainty since the inconclusive Italian election was a factor, while in Spain an auction of three-month bonds attracted demand.

A row is brewing in Brussels after the European Commission denied that president José Manuel Barroso pulled a u-turn yesterday when he said that Europe's austerity programme had reached the limits of public acceptance.

The EC has released a full transcript of the comments, made at a think tank event in Brussels. Austerity and growth debate: What President Barroso actually said at the Brussels Think Tank Dialogue.

They confirm that Barroso did state that the current approach to deleveraging Europe's 'unsustainable' debts was nearing its limits: (as we reported yesterday here).

Barroso said:

So while this policy is fundamentally right, I think it has reached its limits in many aspects, because a policy to be successful not only has to be properly designed. It has to have the minimum of political and social support.

And when asked to clarify by our Europe editor, Ian Traynor, Barroso stated that Europe's programme of deficit reduction had to be "complemented by a stronger emphasis on growth and growth measures in the shorter term:

We have been saying this, but we should say it louder and clearer. If not, even if the policy of correction of the deficit is basically correct, we can always discuss the fine-tuning, the rhythm or the pace, but that will not be sustainable politically and socially.

That's pretty clear, thanks.

So, fast-forward to Brussels where an EU spokesman has also just told the assembled Press Pack that Barroso hasn't changed his position:

Really? Ian, for one, isn't convinced:

Neither is the WSJ's Matina Stevis (who moderated Barroso's session). She also argues that backtracking is an blunder:

And Re-Define's Sony Kapoor speculates that Barroso's comment may not have pleased the German government:

The continuing fall in Eurozone output this month (see 9.19am) led by Germany's shrinking private sector seconomy, shows that there's no improvement in Europe's woes.

Analysts believe an ECB interest rate cut looks likely, but that probably won't be enough to turn the situation around.

Here's the latest reaction:

Carsten Brzeski of ING:

The eurozone’s economic engine is stuttering…

The weather and, much more important, disappointing Chinese activity, are still having a stranglehold over the German economy.

Kit Juckes of Société Générale:

At the margin, it is good news that we saw the divergence between Germany and France partially unwound, with German data coming out soft.

But the underlying story is that one of the best indicators of what is happening to growth suggests a mild depression continues, getting neither better, nor worse.

There will be debate about whether the ECB will cut rates further, though I doubt that would make any economic difference (except to the very front end of the Euro curve). But the ECB won't be tightening for a very, very long time indeed! Peripheral bond markets continue to rally and that in turn means FX models don't point to any great danger to the Euro, though I still think a weaker currency is needed, and inevitable if I am patient enough.

Richard Driver of Caxton FX:

This is yet more lacklustre data from the eurozone; the pace of contraction in France may be slowing but Germany is the one we are all interested in and the picture there looks very bleak indeed. The chances of a German and pan-European bounce back in Q2 are looking pretty remote right now. 

If the ECB don’t respond by cutting interest rates next month then you have to wonder how bad things have to get before they do bite the bullet. This should keep the euro under the cosh in the coming weeks.

Cyprus's finance minister has attempted to calm fears over its bailout by insisting that MPs are certain to approve the deal when it comes to a vote in the coming days.

In an interview with Reuters, finance minister Harris Georgiades argued that the Nicosia parliament has already taken most of the difficult decisions (such as restructuring its banking sector and raising corporation tax)

Georgiades said:

I think parliament will acknowledge there is no alternative at this point.

We don't have a date for this vote yet – except that it is not expected before this Friday.

Georgiades suggested that the current restrictions on cash withdrawals and movement of capital could be eased within a few months.

Asked whether measures would be eased in two, or six months, Georgiades said: "Definitely not six months. I am optimistic we shall be able to proceed much sooner

Georgiades added that Cyprus was in no rush to start selling its gold reserves to raise €400m towards its reform plan, calling the sale:

…not even the most important, or the issue of the greatest magnitude.

Perhaps they're waiting until the gold price has recovered (it's down 0.5% today at ,413 per ounce)

Reuters' full interview is here: Gold sale not a priority – Cyprus finance minister

German sovereign debt has risen in value this morning, pushing down the yield on its 10-year bonds to a new record low:

The German stock market has fallen 0.4% as traders avoid risk and digest the news that Germany's private sector is contracting.

In France, though, the main market is up 1% on relief that its downturn has eased.

Here's a round-up:

German DAX: down 24 points at 7453, – 0.3%

FTSE 100: up 30 points at 6,311, up 0.5%

French CAC: up 37 points at 3687, +1%

Spanish IBEX: up 84 points at 8112, +1%

Italian FTSE MIB: up 101 at 16123, +0.6%

Britain managed to slice £300m off its budget deficit last year, according to the latest Public Finances figures.

The Office for National Statistics reported that the Public Sector Net Borrowing requirement (when various one-off items and financial interventions are excluded) came in at £120.6bn for the 2012-13 financial year.

That's a small improvement on the £120.9bn in the previous year.

Last year's deficit was equal to 5.57% of GDP, according to the ONS's figures. The UK's total national debt rose to £1.1858trn, or 75.4% of GDP (when the cost of financial sector interventions is ignored).

City economists aren't terribly impressed:

Howard Archer of IHS:

Some modestly good news for the Chancellor as the public deficit for 2012/13 came in marginally below the 2011/12 outturn and slightly less than the OBR had estimated in the budget.

Mind you the rate of improvement in 2012/13 makes a snail look fast, but at least the Chancellor can say the finances moved in the right direction!

Sweden's jobless rate has jumped,in another signal that the European economy is struggling.

The unemployment rate in Sweden rose to 8.8% in March, up from 8.5% the previous month. Young people bore the brunt of the labour market, with the unemployment rate for people aged 15-24 rising to 28.1%, from 25.15 a year ago.

Statistics Sweden said this was due to an increase in the number of full-time students who are now full-time student job seekers, unable to find employment.

At 8.8%, Sweden's overall unemployment rate is rather lower than the 12% recorded in the eurozone last month.

Economist Howard Archer of IHS reckons that the ECB is likely to cut interest rates, perhaps as early as next week, following today's data:

The ECB indicated at its April policy meeting that it is increasingly open to taking interest rates down from 0.75% to 0.50%, and latest comments by senior ECB policymakers indicate that that an interest rate cut could well occur if Eurozone economic activity continues to disappoint.

The April purchasing managers surveys certainly seem to fit the bill for an ECB interest rate cut and we believe there is a strong chance that the ECB will act as soon as its 2 May meeting. If the ECB does hold fire on interest rates at its May meeting next week, this looks increasingly likely to be only delaying the inevitable.

Hard to believe a quarter-point rate cut would really bring much cheer to the eurozone, though.

Germany has been dragged deeper into Europe's economic crisis, as the eurozone's private sector continues to contract at the same rate as in March.

That's the broad message from today's PMI data, with France's better-than-expected performance overshadowed by the deterioration in Germany.

Here's Markit's overall PMI data (combining the data from France and Germany).

Eurozone service sector PMI: 46.6, up from March's 46.4

Eurozone manufacturing PMI: 46.5, down from March's 46.8

Eurozone composite PMI: 46.5, marching March's 46.5.

As Markit explained, the region's two largest member states are showing "divergent trends".

While France saw the rates of decline in both business activity and new business ease sharply to the slowest for four and eight months respectively, Germany saw both activity and new business fall at the steepest rates for six months.

The drop in German activity was also notable in being the first since last November.

Elsewhere across the region output fell at the slowest rate for three months in April, though the rate of loss of new business remained marked.

And in further gloom, firms cut payroll numbers (ie, the number of people they employ) for the 16th month in a row.

The euro has fallen since Germany's poor PMI data hit the wires, down amost one cent against the US dollar at .298.

The European Central Bank may respond with an early cut in interest rates, as Owen Callan of Danske Bank Markets explains:

This graph from Markit, of Geman PMI data versus economic growth, shows why today's weak data (see 8.38am) could herald a contraction in GDP this quarter.

Tim Moore, senior economist at Markit, warned that Germany's private sector has been weaking in recent months – leading to today's surprise fall in output (see 8.38am).

The data suggests the German economy could shrink this quarter, Moore explained. He added that German industry is clearly suffering from the crisis in the eurozone periphery:

Weaker demand was attributed to subdued business confidence across the euro area, with clients cutting spending amid concerns about the economic outlook for southern Europe.

In the manufacturing sector, there were also reports that destocking efforts had led to reduced production requirements.

Germany's private sector is shrinking for the first time since last November, with its services and manufacturing sectors both reporting much weaker than expected PMI data.

Both readings came in below the 50-point mark — showing a contraction in Europe's largest economy.

German service sector PMI: 49.2, down from March's 50.9.

German manufacturing PMI: 47.9, down from March's 49.

German composite PMI: 48.8, down from 50.6 in March

That is rather alarming news for Angela Merkel's government… More to follow.

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The weak Chinese PMI data released overnight sent shares sliding, with the Shanghai composite index closing 2.6% lower.

The data has reinforced fears that the Chinese economy is slowing.

CNBC has the full details: here's a flavour:

China's flash HSBC PMI fell to a two-month low of 50.5 in April from 51.6 in March – compared with expectations for a fall to 51.5. A reading above 50 indicates expanding activity and one below 50 signals contraction.

"It's a big miss. Confidence in the outlook for China has really diminished, particularly after first quarter growth data," said Tim Condon, head of research for Asia at ING. "People are now reforming their views on economy. The new view is that growth will be stagnant," he added.

Just in: France's manufacturing and service sectors are still shrinking — but the pace of the downturn is slowing.

French manufacturing PMI: 44.4 in April, up from 44.0 in March. An eight-month high.

French services PMI: 44.1, up from 41.3 in March. A four-month high.

Markit chief economist Chris Williamson told Reuters that the worst may be over for French firms:

They're seeing obviously very weak demand and thinking it can't get any worse, surely it will get better… Policymakers won't allow a further collapse.

A quick explainer of how the PMI data is calculated, and what it shows:

• Markit, the financial data firm, interviews purchasing managers across the private sector to find if their business conditions are better, worse, or the same than last month.

• That information is used to generate the PMI for each sector.

• A PMI of 50 means the sector was flat — anything higher shows growth, while a PMI below 50 indicates that economic activity fell.

And this month, economists predict that the overall composite eurozone PMI (combining services and manufacturing) will come in at 46.5, the same as March. That would mean Europe's private sector is continuing to contract.

Good morning, and welcome to our rolling coverage of the Eurozone financial crisis, and other key events across the world economy.

It's a big day for data. Purchasing Managers Index reports from across the eurozone will show how manufacturers and service sector companies are performing this month.

Economists expect the PMIs to confirm that the eurozone's private sector is still shrinking, as many European countries struggle to come out of recession

That would put more pressure on the European Central Bank to cut interest rates, or even consider more unconventional measures.

The data will also provide fresh fodder for the raging debate on whether the eurozone should slow the pace of its austerity programme. As we reported yesterday, even EC president José Manuel Barroso is now hinting at a change of approach….

We get French PMIs shortly, at around 8am BST. Germany's data comes 30 minutes later, followed by the figure for the whole eurozone at 9am BST (10am CET).

China has already reported its PMIs for April, and they were rather lower than expected. The Chinese flash HSBC PMI fell to a two-month low of 50.5 in April from 51.6 in March. That has knocked stock markets in Asia overnight (more to follow).

Also coming up today… Italy's president, Giorgio Napolitano, will hold meetings in an effort to form a new government. And UK public finances (at 9.30am BST) will show how Britain is faring.

We'll be tracking all that, and other developments across the eurozone and beyond….