European shares set for strong weekly rally despite dip

Euro zone firms up plans for a single bank watchdog, pulls shares up by almost 3%

Spanish and Italian bond yields hit their lowest levels in over half a year on Friday after the euro zone firmed up plans for a single bank watchdog, while European shares and the euro remained on course for strong weekly gains despite a slight dip.

Reassuring global economic data this week and signs of progress in the euro zone debt crisis has left the MSCI index of world shares up almost 3 percent near a 15-month high and the euro up roughly 1.7 percent.

European leaders took a big stride towards establishing a single banking supervisor for the euro zone on Friday, agreeing it would come into force next year, opening the way for the bloc's rescue fund to inject capital directly into ailing banks.

With equity investors in a mood to book profits after four sessions of gains, Europe's main stock indexes opened lower.

The Euro STOXX 50, which has enjoyed its best week of 2012 was down 0.17 percent, while the FTSE 100, France's CAC-40 and Germany's DAX were all slightly lower.

Benchmark Spanish bond yields have come down around half a percent this week, and both Spain and Italy saw dramatically improved bond sales as sentiment towards both continued to pick up.

Spanish 10-year bond yields fell to their lowest in 6-1/2 months as trading resumed on Friday, and Italian yields set a new 7-1/2 month low after the European leaders made progress on banking supervision after 10 hours of talks.

In currency markets, the euro hovered below its one-month high against the dollar following the EU summit, while the yen was near a two-month low against the dollar as speculation mounted over the possibility that the Bank of Japan will take fresh stimulus measures.