LONDON (Bloomberg) — Europe may already have passed its biggest stress test.

The euro has rallied eight percent from a four-year low last month. Greece, Spain and Portugal have managed to sell 50 billion euros ($64 billion) of debt since May 10, when the need to save the single currency forced finance ministers to create a nearly $1 trillion rescue fund and European Central Bank president Jean-Claude Trichet to begin buying bonds.

"The market seems to be much more convinced following the bailout that the euro zone is working and the peripheral countries will be able to finance their debt," said Christoph Kind, head of asset allocation at Frankfurt-Trust, which manages $17 billion. "This goes hand-in-hand with the appreciation of the euro against the dollar."

Data released today show growth in Europe's services and manufacturing industries unexpectedly accelerated in July as concern over the debt crisis eased. The next stage in the European Union's effort to show the euro can withstand the fallout from the Greek-led turmoil comes today when officials publish results of bank stress tests. EU regulators are relying on the exams to reassure investors about the health of financial institutions from Germany's WestLB AG to Spanish savings banks.

"Sovereign and bank risks had become interwoven in markets' eyes, and the stress tests will go some way toward alleviating fears that weakness in banks is going to undermine sovereigns," said David Page, an economist at Investec Securities in London.

A composite index based on a survey of euro-area purchasing managers in both industries increased to 56.7 from 56 in June, London-based Markit Economics said today. Economists had projected a drop to 55.5, the median of 18 estimates in a Bloomberg survey showed. A reading above 50 indicates expansion.

The cost of insuring against losses on bonds issued by Europe's banks and insurers fell to the lowest in a week yesterday on expectation of successful stress tests.

The tests are a "crucial reality check," said Marco Annunziata, chief economist at UniCredit Group in London. If they prompt a negative market reaction, the ECB may face greater demand for liquidity from banks and have to extend the timeframe it lends unlimited amounts of cash to six or even 12 months, potentially delaying interest rate increases, he said.

The extra costs investors demand to buy Spanish and Portuguese bonds instead of comparable German securities declined after debt sales this week and those spreads have narrowed 24 percent and 19 percent respectively from euro-era highs in May. The cost of insuring against sovereign default has also slid and the Frankfurt-based ECB last week bought the lowest amount of bonds since its asset-purchase programme began.

"The recent evolutions on the markets show we are in the process of winning back the confidence that we've lost, but the path will be long," German Finance Minister Wolfgang Schaeuble said yesterday in Paris. "To advance on this path and to avoid a repeat of this sort of crisis, we cannot sit on our laurels."

Demand for funding from the high-deficit nations will also ease. Spain is poised to pay off 24.7 billion euros in bonds and bills in July, the stiffest monthly redemptions remaining this year, and doesn't face another bond maturity until July 2011. Portugal doesn't have bonds maturing until April and Ireland has said it is fully funded until the second quarter of 2011.

A German-led economic rebound is also easing investor concern that the euro-area was headed for disaster. Economists at BNP Paribas SA yesterday revised up their growth estimates to show Europe's largest economy expanding 1.5 percent in the second quarter from the previous three months. Goldman Sachs Group Inc. last week reversed an earlier forecast and predicted the euro will strengthen further against the dollar by January.

"We're convinced the recovery for now is in play," Page of Investec said.

Investors and policy makers are far from declaring mission accomplished, even with Trichet warning investors on July 8 against being "excessively pessimistic" about Europe. Budget cuts intended to tame deficits and calm markets may stall growth and are stoking public anger. Rising unemployment and austerity threaten to topple minority governments in Spain and Portugal.

"We are not the Titanic, but let's not fool ourselves into thinking we are safe just because we have first class tickets," Italian Finance Minister Giulio Tremonti said July 20 at the University of Fribourg, Switzerland.

Pushback against austerity in Hungary highlights the risks for euro-region countries. Talks between Hungary's two-month-old government of Viktor Orban, the EU and International Monetary Fund broke down this week, delaying payments from a 20-billion euro aid package. Orban sought to widen the country's deficit targets after five years of belt tightening that led the economy to contract 6.3 percent last year. The stand-off sent the forint to a 14-month low on July 19.