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Euro-zone sensitive plays like HSBC (0005.HK), which makes up a chunky 15 percent of Hong Kong's Hang Seng index, rose nearly 3 percent, helping the index gain 1.7 percent.

In Japan, stocks such as Canon (7751.T) and Nikon (7731.T) climbed, benefiting from a stronger euro, which would boost their exports.

Even as markets greeted the Europe news with relief, the single currency still faces considerable headwinds in its march toward a early May peak of near $1.50 as doubts regarding longer-term effectiveness of the deal remained.

An emergency summit of leaders of the 17-nation currency area pledged on Thursday to conduct a second bailout of Greece with an extra 109 billion euros ($157 billion) of government money, plus a contribution by private sector bondholders estimated to total as much as 50 billion euros by mid-2014.

Investors who have been stricken by a series of factors ranging from the U.S. and Europe debt crises to concerns about a sharp slowdown in China used this rare bit of good news to pick up bargains.

Australian shares .AXJO rose one percent while Japan's Nikkei .N225 climbed 0.8 percent though a stronger yen may check gains.

The MSCI index of shares for Asia ex-Japan .MIAPJ0000PUS rose more than 1.1 percent, set for a fourth consecutive day of gain.

Equity gains were also sustained by a strong close on Wall Street with banks among the best performers after surprisingly strong results from Morgan Stanley (MS.N).

Emerging markets remain a preferred investment destination despite the uncertainty surrounding markets. Both emerging market equities and debt recorded decent inflows in the week ended July 20, according to Thomson Reuters Lipper data.

EURO GAINS SHORT-LIVED?

Demand for risk was also rekindled as hopes of a breakthrough in the U.S. debt deadlock gathered momentum with the White House and top lawmakers scrambling to sort through competing options before a August 2 deadline.

In currency markets, the euro vaulted more than 1 percent to as high as $1.4440 on trading platform EBS, the highest level since July 6, before easing slightly to $1.4386, up more than a percent since Thursday.

The single currency's way forward is strewn with technical resistance levels in the areas of 1.4458, 1.4493 and 1.4519.

Barclays Capital said the latest rescue package remains short of key details in areas like private sector involvement and the proposed size of the euro zone's rescue fund.

"The dollar is broadly weighed down, while the euro was lifted mainly by short-covering and it may have some more room to climb until around $1.45," said Makoto Noji, senior bond and currency strategist at SMBC Nikko Securities.

"Still, the market is not overly optimistic as the euro's effective exchange rate has not come up. The euro also remains under pressure against the Swiss franc and the yen as the euro zone debt problems linger," Noji said.

For now, though, markets focused on the headline news and pushed down safe-haven assets like gold and U.S. Treasuries.

Gold fell to around $1,590 an ounce, about $20 below a record high of near $1,610 set on Tuesday. Silver tumbled more than 2 percent.

In bond markets, yields on ten-year U.S. Treasury notes stabilized around 3 percent after rising by more than 12 basis points in the past three sessions.

The results failed to excite a market already wary about growth prospects for the company and PC industry as netbook sales give way to tablets. The stock was flat in after-hours trading.

"All eyes are on Windows and how they are ultimately going to extend this franchise in the future, as the PC business continues to lose share to the tablets," said Josh Olson, technology analyst at money manager Edward Jones. "Microsoft is really a show-me story in terms of its ability to extend its core flagship products to these new growth platforms."

On Wednesday, chipmaker Intel Corp warned that PC sales will not be as strong as it had expected this year.

Microsoft is expected to enter the tablet market in earnest next year with the launch of its next operating system -- code-named Windows 8 -- which will be compatible with the low-power chips designed by ARM Holdings favored by tablet and mobile phone makers.

Despite the Windows dip, Microsoft managed to ease past Wall Street's earnings estimates, helped by strong sales of its Office software and Xbox game console, as well as a dramatic drop in its tax bill.

The world's largest software maker follows Google Inc, Apple Inc and International Business Machines Corp in reporting surprisingly good results as technology spending holds up relatively well in an uncertain economy.

BIG BEAT

The Redmond, Washington-based company on Thursday posted net profit of $5.87 billion, or 69 cents per share, up from $4.52 billion, or 51 cents per share, in the year-ago quarter.

That easily beat Wall Street's average estimate of 58 cents, according to Thomson Reuters I/B/E/S. Microsoft has beaten the average profit estimate for each of the last nine quarters.

Microsoft was helped by an unusually low tax rate of 7 percent in the quarter, which cut its tax bill by more than $1 billion from the year before, to $445 million. The company, which gets most of its revenue from overseas, said the savings were due to a one-time tax gain and more business flowing through its regional centers in the low-tax jurisdictions of Ireland, Singapore and Puerto Rico.

Sales rose 8 percent to $17.37 billion, ahead of analysts' average estimate of $17.23 billion, boosted chiefly by sales of Office, Xbox and server software behind Microsoft's push into Internet-centric, or "cloud" computing.

Microsoft shares fluctuated after the results were announced in after-hours trading, settling close to their closing price of $27.09 on Nasdaq. The stock is up 8 percent over the past 12 months, compared to a 30 percent rise in the Nasdaq composite index. The shares are stuck at a level first hit in 1998, adjusted for stock splits.

"These numbers are good. The question is, what will make Microsoft break this range in which it is stuck, between $25 and $28?" said Trip Chowdhry, managing director at Global Equities Research. "I don't see these numbers giving an indication that the stock is going to break away."

OFFICE, XBOX STAR

Spending by businesses on technology has generally outstripped cash-strapped consumers since the worldwide economic downturn.

Microsoft's business division, which last month rolled out online versions of its popular Office suite of programs such as Outlook, SharePoint and Excel, was the company's biggest seller in the quarter, racking up a 7 percent increase in sales to $5.8 billion.

The server and tools business, which sells software used by datacenters -- an essential building block of cloud computing -- posted a 12 percent increase in sales to $4.6 billion.

The entertainment and devices unit, which sells the company's video game and phone products, posted a 30 percent increase in sales to $1.5 billion, mostly due to the popularity of the Xbox and the new hands-free gaming Kinect add-on.

Sales at the Windows unit fell 0.8 percent to $4.7 billion. PC sales grew only 2.3 percent in the second quarter, according to tech research firm Gartner, well below earlier projections, as economic uncertainty hangs over consumers and Apple's iPad and other tablets eat into the market.

Microsoft's perennial money-losing online services unit, which runs the Bing search engine and MSN Internet portal, posted a 16.5 percent increase in sales to $662 million, but its loss widened to $728 million from a loss of $688 million a year ago, as Microsoft continues to pour money into attacking Google. The unit has now lost almost $6.5 billion in the last three fiscal years.

(Additional reporting by Alexei Oreskovic in San Francisco and Liana Baker in New York; Editing by Richard Chang)

The deficit reduction debate is coming up against an August 2 deadline when the $14.3 trillion limit on America's borrowing capacity is exhausted, putting in jeopardy payments on U.S. Treasury debt as well as paychecks for federal employees and soldiers.

If an agreement is reached to raise the debt ceiling but nothing meaningful is done in terms of deficit reduction, the U.S. would likely have its rating cut to the AA category, S&P said.

"While banks and broker-dealers wouldn't likely suffer any immediate ratings downgrades, we would downgrade the debt of Fannie Mae, Freddie Mac, the 'AAA' rated Federal Home Loan Banks, and the 'AAA' rated Federal Farm Credit System Banks to correspond with the U.S. sovereign rating," S&P said in its report.

"We would also lower the ratings on 'AAA' rated U.S. insurance groups, as per our criteria that correlates insurers' and sovereigns' ratings," the firm said.

However, S&P said it sees a failure to reach an agreement on raising the debt ceiling and reducing deficits as the least likely scenario, adding that in such a case the global financial markets would be in turmoil and "likely shove the U.S. economy back into recession."

In such a hypothetical case, it envisages the U.S. Treasury curtailing spending sharply and the U.S. Federal Reserve launching another round of quantitative easing to help prop up the economy.

"Under this scenario, we expect that interest rates could rise--say, 50 bps on short-term rates and double that on the long end--though this may depend on whether Treasuries would lose their status as the safe haven that investors have historically perceived them to be, or whether physical assets such as gold would benefit from such a flight to quality," S&P said.

It added that either way, corporate borrowers would likely see yield spreads widen while equity markets and the U.S. dollar would likely suffer.

The outline of potential knock-on effects of a U.S. credit rating downgrade were first reported by Market News International.

As Aug 2 approaches, the U.S. Treasury market has grown sensitive to news on the potential for the U.S. to actually default or, even if Washington can reach a deal to avoid default, a downgrade based on longer-term fiscal conditions.

The S&P's latest comments led to selling in longer-dated Treasuries, with the 30-year bond briefly falling a full point in price.

(Reporting by Emily Flitter and Daniel Bases; Editing by Theodore d'Afflisio)

Initial claims for state unemployment benefits increased 10,000 to a seasonally adjusted 418,000, the Labor Department said.

Economists polled by Reuters had forecast claims rising to 410,000. The prior week's figure was revised up to 408,000 from the previously reported 405,000.

The claims data covered the survey period for the closely watched nonfarm payrolls count for July. Initial claims dropped 11,000 between the June and July survey periods, suggesting a modest improvement in payrolls after June's paltry 18,000 gain.

A rise in layoffs held back payroll growth in May, according to the department's latest Job Openings and Labor Turnover Survey, which was released last week. Layoffs were probably behind the downshift in employment growth in June as well.

A government shutdown in Minnesota following a budget impasse resulted in an additional 1,750 state employees filing claims for jobless benefits last week.

Initial claims have now been above the 400,000 mark for 15 straight weeks. That level is usually associated with a stable labor market.

The four-week moving average of claims, considered a better measure of labor market trends, slipped 2,750 to 421,250.

The number of people still receiving benefits under regular state programs after an initial week of aid dropped 50,000 to 3.70 million in the week ended July 9.

The number of Americans on emergency unemployment benefits declined 80,133 to 3.15 million in the week ended July 2, the latest week for which data is available.

A total of 7.33 million people were claiming unemployment benefits during that period under all programs, down 159,000 from the prior week. (Reporting by Lucia Mutikani; Editing by Neil Stempleman)

Intel Corp (INTC.O) trimmed its forecast for 2011 personal computer unit sales, warning of softness in mature markets and sending its shares down more than 1 percent even as its revenue outlook beat estimates. The shares traded in Frankfurt (INTC.F) were down 2.8 percent.

American Express Co (AXP.N) posted a 31 percent increase in second-quarter profits, beating analysts' expectations, as customers spent more on their cards and the company's processing revenue jumped. The shares traded in Frankfurt (AXP.F) were down 0.1 percent.

European stocks were down 0.6 percent in morning trade, led lower by tech stocks as investors ditched shares in mobile phone network equipment supplier Ericsson (ERICb.ST) after it missed earnings forecasts, due to a hefty jobs cut charge, and forecast less profitable business in the pipeline in Europe.

Investors awaited the emergency euro zone summit in Brussels on Thursday to see if a new bailout deal can be forged for debt-stricken Greece. After seven hours of talks late into Wednesday night between German Chancellor Angela Merkel and French President Nicolas Sarkozy in Berlin, the two leaders reached a common position on a second rescue package for Greece, that will be presented to the meeting. Details of the common position were not revealed.

A buyback of Greek debt is the only form of private sector involvement in the second bailout that has a chance of not triggering a downgrade of Greek sovereign debt to a 'selective default', a euro zone source said. Euro zone sources close to talks on Thursday on the second bailout said the buyback idea was one of the main options now under consideration.

On the earnings front, investors awaited results from companies including Morgan Stanley (MS.N), Advanced Micro Devices Inc (AMD.N), Eli Lilly (LLY.N), Microsoft Corp (MSFT.O), Pepsico Inc (PEP.N) and AT&T (T.N).

On the macro side, the market awaited weekly jobless claims, as well as leading indicators.

Data showed on Thursday Chinese manufacturing contracted for the first time in a year in July and at its fastest pace since March 2009, as the country's monetary policy tightening and sluggish global demand weighed on the economy.

U.S. stocks closed near unchanged on Wednesday, a day after Wall Street's best rally since March, as the oncoming debt ceiling deadline overshadowed strong earnings from Apple Inc.

The Dow Jones industrial average lost 15.51 points, or 0.12 percent, at 12,571.91. The S&P 500 Index shed 0.89 points, or 0.07 percent, at 1,325.84. The Nasdaq Composite Index fell 12.29 points, or 0.43 percent, at 2,814.23.

(Reporting by Blaise Robinson; Editing by Greg Mahlich)