LONDON (AP) - WORLD markets rallied on Tuesday, with Japan's main index snapping a nine-day losing streak, as investors expected US banks to report upbeat second quarter earnings.

The gains in Europe and Asia follow on from a solid performance on Wall Street - both the Dow Jones industrial average and the broader Standard & Poor's 500 index spiked by more than 2 per cent on Monday.

Financial stocks led US equities higher after respected banking analyst Meredith Whitney placed a 'buy' recommendation on Goldman Sachs Group Inc. The company kicks off the banks' reporting season later on Tuesday.

Investors will be particularly interested to see if the US banks, which some say were the catalyst to the first synchronized global economic downturn since the Second World War, have got their finances back into health following massive government bailouts and share offerings.

Goldman Sachs is followed later in the week by JPMorgan Chase & Co, Bank of American Corp and Citigroup Inc.

It's not just the banks in focus this week. The world's biggest chip maker Intel Corp will also likely generate headlines on Tuesday when it reports, as will search engine firm Google Inc on Thursday.

Meanwhile, industrial production figures generated early hopes that the 16 countries that share the euro may be slowly recovering from recession.

A fall in German investor sentiment dampened market optimism, however. The ZEW institute said its monthly index, which measures investors' outlook for the next six months, slipped to 39.5 points this month from 44.8 in June. Germany's export-dependent economy sank into recession last year as the global downturn dried up demand for its manufactured goods.

Equities rose from the middle of March until the start of June on hopes that the US economy in particular will recover from recession sooner than anticipated and that stocks were undervalued relative to their earnings potential.

But disappointing economic news over the last few weeks, culminating in a worse than expected US jobs report for June, altered the mood prevailing among investors that a significant rebound in the US was a possibility. Since recent highs in early June, the S&P index and the Dow Jones industrial average have dropped around 7 per cent. -- AP