Australian shares rebounded strongly to finish the day in positive territory after initially falling more than one per cent.

The consumer price index (CPI) for the September quarter showed that inflation slowed, prompting a turnaround in retail and banking stocks.

IG Markets dealer Chris Weston said the market could hang onto its gains, despite trepidation about the European leaders summit on Wednesday night.

It was the news that a key meetingof European finance ministers had been cancelled ahead of the summit that drained confidence from US and European markets.

Australian share prices had followed suit but by 1610 AEDT the local market had rebounded.

The benchmark S&P/ASX200 index closed up 14.6 points, or 0.35 per cent, at 4,242.5 on Wednesday, while the broader All Ordinaries index gained 13.1 points, or 0.31 per cent, to 4,300.8.

National turnover was 1.67 billion shares worth $4.38 billion, with about 10 stocks falling for every nine that gained.

Mr Weston said the market now fully expected a rate cut.

“The discretionary stocks are looking like they’re seeing a bit of leeway,” he said.

The big four banks all closed higher after starting the day down.

ANZ gained four cents to $21.59, National Australia Bank, which reports its full year earnings on Thursday, rose 28 cents to $24.95, Westpac increased 30 cents to $22.30 and Commonwealth Bank gained 39 cents to close at $49.11.

Retailers also rose, with Woolworths up 11 cents at $24.15, David Jones up 12 cents, or 3.7 per cent, at $3.36 and JB Hi-Fi up 70 cents, or 4.7 per cent, at $15.74.

In the resources sector, gold miner Newcrest was up $1.15, or 3.5 per cent, at $34.40 after a rise in the gold price overnight.

The spot price of gold in Sydney at 1700 AEDT was $US1,719.32, up $63.67 from $US1,655.65 on Tuesday.

Intrepid Mines had gained 10.5 cents, or 9.95 per cent, to $1.16, Perseus Mining rose 12 cents, or 3.86 per cent, to $3.23 and Alacer Gold rose 81 cents, or 7.8 per cent, to $11.19.

BHP dropped 23 cents to $36.94 and Rio Tinto was up 11 cents at $66.74.

Making news, Insurance Australia Group said it was on track to deliver on its full year financial guidance after an encouraging performance in the first quarter.

Its shares were up four cents at $3.16.

The December share price index futures contract was up six points at 4,222 with 36,448 contracts traded.