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A statue of George Washington looks over the entrance to the New York Stock Exchange August11, 2011.

LONDON — Signs that the U.S. Congress was set to pass a deal to raise the country's debt ceiling sent stock markets soaring Wednesday, just hours ahead of a deadline that has raised fears of a potential default by the world's biggest economic power.

Reports suggest that both sides of the Senate are very close to agreeing on a deal to raise the debt ceiling and bring an end to the 16-day partial shutdown of the U.S. government. Officials said the proposal called for the Treasury to have authority to continue borrowing through Feb. 7, and the government would reopen through Jan. 15.

The lower House of Representatives is expected to agree to the Senate plan and there are even suggestions that it may vote first — an arrangement that would speed its way through Congress to President Barack Obama's desk.

"Hopes for a resolution have seen a sharp reaction in the market," said Kathleen Brooks, research director at

Europe's markets recovered from sizeable losses earlier. The FTSE 100 index of leading British shares closed up 0.3 percent at 6,571.59, while Germany's DAX rose 0.5 percent to 8,846.00. The CAC-40 in France recovered but still ended 0.3 percent lower at 4,243.72.

In the U.S., the Dow Jones industrial average was up 1.2 percent at 15,347 while the broader S&P 500 index rose 1.3 percent to 1,719.

Though the U.S. debt standoff has been the primary point of interest in financial markets for the past few weeks, investors have taken much of the political posturing in stride. The idea that U.S. lawmakers would allow the country to default seemed too fanciful for many.

Without a deal to raise the debt ceiling, the U.S. government would lose its ability to borrow and be required to meet its obligations by relying on cash reserves and incoming tax receipts. The U.S. could be unable to repay holders of Treasury bills that mature in coming days or meet interest payments on longer-dated Treasurys — putting it in default on its debt.

Even though a deal appears appears to be imminent, analysts said the long-term damage to the U.S.'s economic reputation and the dollar's status as the world's reserve currency could be hefty. Fitch warned it could strip the U.S. of its triple-A rating even if a deal is reached in time.

Simon Derrick, a senior analyst at Bank of New York Mellon, said the U.S.'s credibility is "long shot" and that the whole episode has "undermined faith" in the country. As such, foreign exchange reserve managers around the world, notably in China, will be looking at how to diversify their portfolios from an over-reliance on the dollar.

The dollar has held up relatively well over the past few weeks, partly because there is no clear alternative to the currency's reserve status at present. Hopes of a deal helped shore up the currency Wednesday, with the euro 0.3 percent lower at $1.3488.

Oil prices have also gotten a boost, with the benchmark New York rate up 54 cents at $101.75 a barrel.

Earlier in Asia, before the outlines of a deal were apparent, trading was far more cautious. Japan's Nikkei 225 rose 0.2 percent to close at 14,467.14 while Hong Kong's Hang Seng dropped 0.5 percent to 23,228.33. China's Shanghai Composite fell 1.8 percent to 2,193.07. Australia's S&P/ASX 200 added 0.1 percent to 5,262.91.