European stocks advanced after the euro-area central bank unexpectedly cut the benchmark interest rate and reports that Greek Prime Minister George Papandreou may quit reduced the chance of a vote on the bailout package.

Swiss Re Ltd. and Man Group Plc each gained more than 5 percent after reporting better-than-expected earnings. Cable & Wireless Communications Plc jumped 9.6 percent after saying restructuring is ahead of schedule.

The benchmark Stoxx Europe 600 Index climbed 2.2 percent to 242.52 at 1:23 p.m. in London, after the European Central Bank's rate decision. The stocks earlier erased their losses amid speculation that Greece will cancel the referendum as Papandreou's ruling Pasok party split over the question.

“Market participants are speculating that the Greek prime minister has lost the majority and this could lead to a cancellation of the referendum and Papandreou's possible resignation,” said Stephane Ekolo, chief European strategist at Market Securities in London. “From a market perspective, it seems to be good news. It somehow reduces uncertainty and may pave the way for the implementation of the austerity measures.”

The ECB unexpectedly cut interest rates as Italian and Spanish borrowing costs soared after euro-area leaders raised the prospect of Greece exiting the monetary union.

ECB officials, meeting under the presidency of Mario Draghi for the first time, cut the benchmark interest rate by 25 basis points to 1.25 percent. Forty nine of 55 economists in a Bloomberg News survey expected no change, four predicted a quarter-point reduction and two forecast a half-point cut.

Greek Prime Minister Papandreou will step down today and propose a coalition government headed by former ECB vice- president Lucas Papademos, the BBC reported, without saying how it got the information.

Papandreou won't resign and plans to speak in parliament today as scheduled, two officials with the ruling party said.

The Stoxx 600 has lost 2.7 percent so far this week as the Greek referendum call had surprised euro-area leaders who cut off aid to the region's most indebted country. They viewed the referendum as a vote on Greece's membership of the euro.

Crisis talks ended late yesterday with German Chancellor Angela Merkel and French President Nicolas Sarkozy withholding 8 billion euros ($11 billion) of assistance and warning Greece it will lose all European aid if it votes against the package agreed upon only last week.

“The referendum will revolve around nothing less than the question: does Greece want to stay in the euro, yes or no?,” Merkel told reporters. Sarkozy said Papandreou's government won't get a “single cent” of aid if voters reject the plan.

Leaders from the Group of 20 economies are meeting at a summit in Cannes, France, today with a discussion on Greece and the euro area.

Federal Reserve Chairman Ben S. Bernanke signaled additional monetary stimulus may be needed to lower U.S. unemployment as policy makers projected little acceleration in growth after last quarter's pickup.

Potential actions are “on the table,” including a third round of securities purchases, extending the period of record- low interest rates or being more specific about when rates would rise, Bernanke said at a press conference yesterday after European markets closed.

Bernanke warned that economic improvement will probably be “frustratingly slow,” with policy makers forecasting a 1 percentage-point drop in the jobless rate to about 8 percent over two years.

Swiss Re rose 6.6 percent to 49.26 Swiss francs. The world's second-biggest reinsurer said third-quarter profit more than doubled to $1.35 billion. That beat the $539 million average estimate of nine analysts surveyed by Bloomberg.

Man Group gained 5.2 percent to 148.6 pence. The biggest publicly traded hedge-fund manager reported a smaller-than- forecast decline in pretax profit in the fiscal first half. Pretax profit dropped to $195 million in the six months through September from $227 million in the year-earlier period, London- based Man Group said. Man had earlier forecast pretax profit of $185 million.

Cable & Wireless Communications jumped 9.6 percent to 40 pence. The company said first-half net profit before exceptional items rose 9 percent to $163 million. The company also said restructuring is ahead of schedule.

Rheinmetall AG tumbled 3.1 percent to 36.81 euros. The maker of KS Kolbenschmidt engine pistons and a partner in Germany's Puma battle tank said it won't stage an initial public offering of its automotive unit, citing stock-market declines. Rheinmetall's third-quarter earnings before interest and taxes rose to 76 million euros, missing analyst estimates.

Service industries in the U.S. probably grew at a faster pace in October, indicating the biggest part of the economy is holding up, economists said before a report today.

The Institute for Supply Management's non-manufacturing index rose to 53.5 from 53 in September, according to the median estimate of 77 economists surveyed by Bloomberg News. Readings above 50 signal expansion.

Bloomberg

Instant Insights /

European Stocks Extend Gains

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