LONDON (AP) European stocks rallied yesterday as Ireland was expected to pass a deficit-slashing budget and the US government agreed to extend some tax cuts and unemployment benefits.

The 16 euro nations, meanwhile, said they would not boost their €750 ($1 trillion) financial backstop, but left the door open to increases in case of need.

European indexes made sharp gains, with Britain’s FTSE 100 up 0.6 percent and Germany’s DAX breaching the 7,000 mark for the first time since the summer of 2008, when Lehman Brothers’ collapse unleashed the worst of the global financial crisis.

France’s CAC-40 was also higher, while Asian indexes closed mostly higher.

Stocks were boosted after President Barack Obama announced an agreement with Republicans on Monday night to extend Bush-era tax cuts for two years, renew unemployment benefits and grant a one-year reduction in Social Security taxes.

That compounded positive sentiment in Europe, where Ireland was expected to pass a budget of sharp austerity measures later in the day. The budget, the toughest in the country’s history, will cut spending by €4.5 billion ($6 billion) and raise taxes by €1.5 billion.

“Market focus will swing back Dublin’s way today with the budget for 2011 under discussion,” said Daragh Maher, an analyst at Credit Agricole CIB.

The government has only a slim majority, but the budget is expected to pass after the government promised to hold early elections. Ireland is due to begin borrowing soon from a €67.5 billion ($90 billion) bailout fund unveiled last week to help it cope with a massive banking crisis.

Meanwhile, a meeting of eurozone finance ministers offered no new measures to contain the turmoil, but said they would not rule out a possible increase to the bailout fund if needed. The fear is that if larger countries like Spain or Italy need rescuing in the future, the current fund would be insufficient.

Coupled with support measures from the European Central Bank, the news flow was positive enough to push the euro higher. The common currency rose to $1.3378 from $1.3304 late the day before.

In Asia, China’s benchmark Shanghai Composite index rebounded from early losses to gain 0.7 percent to 2,875.86, despite speculation that Beijing may hike interest rates soon. Hong Kong’s Hang Seng Index also bounced back to rise 0.8 percent to 23,428.15.