Italy has shown the first signs of backing away from a budget clash with Brussels, sparking a share rally in Rome.

On a day when equities rose across the globe, tentative signs of progress in negotiations between the European commission and Italy’s populist leaders resulted in the key barometer of the Italian stock market rising by almost 3%.

Bank shares – seen as particularly vulnerable in the event of a loss of confidence in Italian assets triggered by a prolonged confrontation – were up by 5% on Monday.

Reports that Rome was willing to cut its budget deficit from 2.4% of national output to as low as 2% also led to a fall in the interest rate the Italian government pays to borrow on the world’s financial markets.

Italy’s main stock market index – the FTSE MIB – was the best performer of the leading European bourses on a day of across-the-board gains, closing 2.8% higher. Frankfurt’s Dax index rose by 1.45%, while the City’s FTSE 100 ended the day up by 1.2% at 7,036.

After sharp falls last week, shares rallied on Wall Street and the Dow Jones industrial average ended Monday trading 1.5% higher amid signs of strong Black Friday spending by American consumers.

Ever since it came to power in the spring, Italy’s coalition government has been on a collision course with the commission over its plans to stimulate growth by running a bigger budget deficit.

The proposed move would violate the eurozone’s fiscal rules and in the past few weeks investors have become increasingly more nervous about Italy’s public finances.

The concessions hinted at by the Rome government would go nowhere near far enough to meet the demands made by Brussels, however.

A proposed budget deficit of 2% of GDP would still leave open the possibility of Rome being fined by the commission’s excessive deficit procedure rules but even a partial climbdown was enough to trigger a fall in 10-year Italian bond yields – a key benchmark of official borrowing costs.

The spread between the interest rate Italy pays and the much cheaper interest rates for Germany fell to its lowest in more than a month.

Analysts said pressure to revise the budget came from a lacklustre bond sale last week, which suggested that domestic investors are losing faith in Italian assets. Even so, the rally eased as the day wore on as the financial markets grew concerned that the concessions being made by Italy would not be enough.

Luigi Di Maio, Italy’s economics minister and deputy prime minister, said: “What is important is that the budget contains the goals that we have established. Then if the negotiation means that the deficit [target] must come down a bit, for us it’s not important.”

Cyril Regnat, a Paris-based bond strategist at the investment bank Natixis, said he was surprised at both the timing of Rome’s apparent shift after Italy’s deputy prime minister, Matteo Salvini, recently ruled out tweaking the budget, and the market reaction.

“The market is overreacting,” he said. “As of today, we don’t have any real backing or figures [to the reports of lowering the budget deficit target].”

Regnat said that a likely fall in Italian economic growth in 2019 would make the probability of hitting a deficit target of 2% or 2.2% “very small”.

• This article was amended on 27 November 2018 because an earlier version referred to Luigi Di Maio as Italy’s finance minister. Di Maio is the country’s economics minister and deputy prime minister.