By Jeremy Gaunt, European Investment Correspondent
LONDON, June 29 (Reuters) - Equities gained strongly and the euro rose on Wednesday as investors bet on the ability of Greece's government to pass new austerity measures designed to prevent the country from going bankrupt.
Wall Street looked set to join in the rally.
A positive vote later in the day is essential for Greece to obtain new funding from the European Union and International Monetary Fund to help to manage its huge debt burden.
"A lot of work has been done behind the scenes to ensure that the proposals get passed, and that optimism is getting reflected," said Graham Bishop, equity strategist at RBS.
European shares were up 1.5 percent heading for their third day of gains in a row.
Globally, the MSCI all-country world stock index gained 0.9 percent and Japan's Nikkei closed up 1.5 percent.
In a boost to embattled Prime Minister George Papandreou, one of three rebel deputies from his ruling Socialist party backtracked and said he would support the austerity plan.
Meanwhile, Greek central bank Governor and European Central Bank policymaker George Provopoulos warned that a "no" vote would be "suicide" for Greece.
Greece has around 345 billion euros-worth of outstanding government debt. Its 10-year bonds are yielding more than 16.5 percent, indicating that future borrowing costs would be prohibitive.
The fear among policy makers and investors is that a default by Greece would rapidly spread to other peripheral euro zone economies, into banks through losses, and ultimately across the world in the same way as the 2007-8 credit crisis.
There remains little confidence, however, that Wednesday's vote will do much more than ease the situation temporarily.
"The Greek plan is largely expected to be passed by its parliament. But even when this hurdle is cleared the long-term outlook remains unclear," said Kimihiko Tomita, head of foreign exchange at State Street Bank and Trust in Tokyo.
EURO FIRMS
The euro shrugged off earlier weakness to stand 0.4 percent higher against the dollar at just above $1.44 .
It was lifted by both the prospect of a Greek "yes" vote and prospects for further interest rate hikes in the euro zone. Comments by European Central Bank President Jean-Claude Trichet were interpreted by markets as signalling a July interest rate rise.
Traders said a positive outcome in the vote could push the euro towards $1.4500, though concerns about whether Greece can implement the measures would remain. "If the Greece vote is passed there is some upside potential for the euro, though this is more based on weakness in the U.S. economy and expectations for a euro zone rate hike next week," said Mic Ingenuus, currency strategist at Nordea in Copenhagen.
Core euro zone government bond prices fell and demand for peripheral debt rose.
"A relief rally will be short-lived but relief there will be," said Nick Stamenkovic, rate strategist at RIA Capital Markets.
(Additional reporting by Jessica Mortimer, Atul Prakash and Kirsten Donovan; written by Jeremy Gaunt; editing by Stephen Nisbet)