European stocks edge up in nervous trade

European stocks rose but the euro stayed under pressure on Tuesday, with markets nervous about the outlook for the region's economy and banks, prospects for government debt sales and a slowdown in the export-focused Chinese economy.

The Bank of France focused attention on the ailing euro zone by reporting growth had stalled at zero in the fourth quarter of 2011 in the region's second-biggest economy.

"There's short-covering and a bit of risk appetite with positive equity markets overnight," said Niels Christensen, currency strategist at Nordea in Copenhagen.

"But we have the debt auctions, the ECB meeting on Thursday and it's still a weak and vulnerable euro going forward, with no sign of a quick solution to the debt problems in the euro zone," he said.

The euro dipped about 0.1% to $1.2750 in early trading, holding above the 16-month lows of $1.2666 hit on Monday due mainly to traders buying back the currency to square their positions after recent heavy selling.

The FTSEurofirst 300 index of top European shares gained about one% after a good start to the US earnings season, recovering from a fall on Monday in thin trade which was led by banking stocks.

French banks were also likely to be in the spotlight after an internal memo obtained by Reuters on Monday showed that Societe Generale is forecasting a "significant" drop in 2012 investment-bank revenue compared with 2011, weighed by higher funding costs and efforts to slash its balance sheet.

China's exports and imports grew at their slowest pace in more than two years in December according to new data, due to both foreign and domestic demand easing. The outcome has fuelled expectations of more policy action from Beijing to support the world's second biggest economy.

Wall Street ended slightly higher on Monday in a light-volume session as investors stayed cautious ahead of the corporate earnings season which kicked off with good results from aluminium giant Alcoa <AA.N>.

Tuesday's focus in euro zone debt markets will mainly be on Austria's auction of 1.3 billion euros of 10-year bonds which will show how worried investors are about the country's exposure to neighbouring Hungary, which is locked in a dispute with the IMF over international aid.

Bund futures were were little changed in early trade.

Elsewhere, British retailers finished 2011 with the best sales growth in months as hefty discounting lured in shoppers, while weak business a year earlier flattered the figures, the British Retail Consortium said on Tuesday.