The US and European stock markets bounced back sharply on Monday after much better-than-expected US data helped ease concerns the economic recovery could falter and threaten recent sustained gains.

Dealers said heavy losses of more than 2.5 percent on Wall Street on Friday first drove the Asian markets down sharply on Monday and made for a hesitant start in Europe.

News over the weekend that CIT, a US bank specialising in loans to small companies, had opted for bankruptcy added to the negative tone by stoking fears that the financial sector still faced huge problems.

However, a surprise return to profit for Ford Motor and then news that US manufacturers increased output well above forecasts gave Wall Street a sharp opening boost, pulling European markets higher in its wake.

A strong reading for construction spending was an added bonus, encouraging investors to look for bargains after last week's heavy sell off.

On Wall Street, the blue-chip Dow Jones Industrial Average was up 1.19 percent at 9828.59 points around 1700 GMT.

In London, the FTSE 100 index of leading shares closed up 1.19 percent to 5104.50 points. In Paris, the CAC 40 gained 0.88 percent to 3639.46 points while in Frankfurt, the DAX added 0.29 percent to 5430.82 points.

In New York, dealers said the economic data and Ford's results helped steady nervous investors who had appeared to be on the verge of a significant pull-back on concerns the markets had got ahead of the fundamentals.

The US manufacturing sector expanded for a third consecutive month in October, with the Institute of Supply Management jumping to 55.7 percent from 52.6 percent in September for its best performance since April 2006.

"The jump in the index was driven by production and employment, with both registering significant gains," said ISM survey chief Norbert Ore.

"Overall, it appears that inventories are balanced and that manufacturing is in a sustainable recovery mode."

Ford meanwhile reported a third-quarter profit net of $997-million on improvement in its North American business, saying it was on track to become "solidly profitable."

Douglas McIntyre at 24/7 Wall Street called the earnings at the number two automaker "a little miracle."

"Almost no one thought Ford could make money in North America ? except Ford," he said.

Some analysts cautioned, however, against reading too much into the latest figures, saying that with gains of more than 50 percent made since March, stocks still looked stretched.

Should there be disappointing earnings or data news, then prices could slide back again, they added.

In Paris, Valerie Pagnol of CM-CIC said the US data shows "a pick-up in activity is certainly there but that is above all due to stock rebuilding and not, as yet, because of a recovery in consumption."

That explains the lack of real enthusiasm for the latest US data, Pagnol said.

Elsewhere in Europe, Amsterdam edged up 0.15 percent, Brussels rose 0.20 percent, Madrid gained 0.45 percent, Milan put on 1.17 percent and Swiss stocks added 0.09 percent.

Earlier Monday, Asian markets took mostly heavy losses as investors there took their lead from Friday's dismal Wall Street performance.

The bankruptcy of US bank CIT appeared to confirm the more pessimistic views on the outlook which quickly resurfaced after Thursday's US growth data, better-than-expected at the headline level, also showed weak consumer spending.

Tokyo ended down 2.31 percent, Sydney dropped 2.21 percent and Hong Kong shed 0.61 percent but Shanghai jumped 2.70 percent after data showed the Chinese manufacturing sector gaining strength.