By Lionel Laurent LONDON (Reuters) - European shares rose and bond yields fell on Tuesday on hopes that a snap election and delayed tax increase in Japan might lead to more economic stimulus measures, which also knocked the yen to its lowest since 2007.
Investors were also cheered by a better-than-expected reading of German investor and analyst sentiment, which pointed to a more positive outlook for Europe's No. 1 economy.
Japanese Prime Minister Shinzo Abe's call for parliament to be dissolved on Friday was widely expected and is seen potentially bringing more measures to stimulate growth after the Japanese economy unexpectedly slipped into recession. Abe also said an unpopular sales tax rise would be delayed.
The yen fell to a seven-year low against the dollar after Abe's comments, extending recent losses in the wake of fresh stimulus measures announced by Japan's central bank at the end of October. It slid to a six-year trough against the euro.
"This is positive for growth and supports the 'overweight' position in Japanese equities we added to on weakness yesterday," said Trevor Greetham, Director of Asset Allocation at Fidelity Worldwide Investment.
The pan-European FTSEurofirst 300 (FTEU3) extended early gains and was up 0.6 percent at 1,359.62 points at 1101 GMT. Japan's Nikkei index had risen 2.2 percent after press reports said Abe would call snap elections and delay the tax increase.
Investor sentiment was also buoyed by Germany's monthly ZEW survey of analyst and investor sentiment, which rose in November for the first time in almost a year, lifting hopes of an improvement in Europe's biggest economy.
The euro rose to $1.253 and core euro zone bond yields retreated after the survey, which added to positive sentiment following comments from European Central Bank chief Mario Draghi on Monday that he was ready to do more to fight deflation.
British inflation meanwhile picked up slightly in October from a five-year low as fuel prices fell less strongly than a year ago, although the Bank of England remains under little pressure to start raising interest rates.
Indeed, fears over global growth, exacerbated by Japan's unexpected third-quarter contraction, have kept the spotlight on policymakers' capacity to do more to avert deflation.
Draghi's comments on Monday mainly reiterated a previous stance that the ECB was ready to do more if inflation remained too low for too long. That pushed euro zone bond yields a touch lower, though the euro was slightly firmer against the dollar.
"We still have some spillover from yesterday's comments from Mario Draghi," Bayerische Landesbank's chief strategist for global interest rates Marius Daheim said.
The picture was more mixed in emerging markets. Stocks lost ground and tracked Asian markets outside Japan, where the mood had soured over downbeat Chinese house prices. Dollar-denominated assets in Russia were up, bucking the trend.
Oil prices were firmer, with Brent crude up 21 cents to $79.52 per barrel while U.S. crude rose to $75.97.
The airline sector, up recently thanks to falling oil prices, was in focus after low-cost carrier easyJet (L:EZJ) said it was positioned to deliver further growth.
Nigeria's naira fell to a new intraday low of 176.30 against the dollar on Tuesday, with the central bank making no fresh intervention to prop up the currency, dealers said.
(Additional reporting by Blaise Robinson in Paris, Emelia Sithole-Matarise, Patrick Graham and Karin Strohecker in London; Editing by Catherine Evans)