A rebound in investor confidence in eurozone powerhouse Germany sent Frankfurt stocks to a nearly 5-year high on Tuesday and lifted equities across Europe.
Frankfurt's DAX 30 added 0.78 percent to 7,589.75 points, its highest level since the beginning of 2008.
Meanwhile in Paris the CAC 40 jumped 0.94 percent to reach its highest level since July 2011 at 3,646.15 points.
London's FTSE 100 index of leading companies edged up 0.06 percent to 5,924.97 points, close to a nine-month high.
Milan's FTSE Mib benchmark meanwhile rebounded by 1.51 percent to 15,585.61 points, one day after slumping 2.22 percent after Italian Prime Minister Mario Monti announced his intention to resign.
Madrid's IBEX 35 rose 1.49 percent to 7,920.9 points, clawing back the previous day's losses.
In foreign exchange trading, the European single currency climbed to $1.2990 from $1.2939 late in New York on Monday. Gold prices eased to $1,710 an ounce on the London Bullion Market, from $1,712.50.
German investor sentiment topped a seven-month high this month on hopes Europe's top economy will dodge recession, data showed on Tuesday.
The widely watched investor confidence index calculated by the ZEW economic institute soared to 6.9 points in December from minus 15.7 points in November.
That was the highest reading since May and also the first time since then the index has been in positive territory, the institute said.
"It is an early unexpected Christmas present for markets," said ETX Capital trader Ishaq Siddiqi in reference to the upbeat data.
"After a run of poor German data and growth forecast downgrades by Bundesbank and European Central Bank, the ZEW today shows business confidence is regaining ground.
"German businesses clearly feel the worse of the euro zone crisis is over, with recovery hopes now in place for next year."
Matt Basi, a trader at CMC Markets, said stocks were also boosted "as peripheral European bond yields continue to retreat from yesterdays highs in recognition of what can now be viewed as a knee-jerk reaction to Italys ongoing political dramas."
Italy's 10-year bond yield dropped to 4.718 percent from 4.817 percent, while Spain's fell 5.459 percent from 5.563 percent on Monday.
Italian Prime Minister Mario Monti said he would resign and Silvio Berlusconi threatened a comeback on an anti-austerity platform over the weekend.
The banking sector meanwhile shifted into focus after HSBC said it would pay US authorities a record $1.92 billion to settle allegations of money laundering.
HSBC, which is listed in Hong Kong and London, said in a statement that it would pay the equivalent of 1.48 billion euros or £1.2 billion as part of an agreement with several US authorities including the US Department of Justice.
The bank admitted to having "inadequate" controls in place, accepted responsibility for the group's past mistakes and added that it would finalise a deal soon with Britain's Financial Services Authority watchdog.
The global giant was thrown into crisis earlier this year when a US Senate report found it had allowed affiliates in Mexico, Saudi Arabia and Bangladesh to move billions of dollars in suspect funds into the US without adequate controls.
US lawmakers accused the company of giving Iran, terrorists and drug dealers access to the country's financial system.
In reaction to the fine, HSBC's share price added 0.56 percent to 644.80 pence in London afternoon deals. The group's Hong Kong-listed shares rose 0.31 percent to end at HK$79.70.
"HSBC is anxious to draw a line under the affair. Emphasising a transformation at the bank over the last two years, the bank has agreed to pay a record fine," said analyst Keith Bowman at Hargreaves Lansdown Stockbrokers.
The bank had already set aside $1.5 billion for fines linked to money-laundering in the United States.
Asian markets traded mixed with Hong Kong ending 0.21 percent higher, Tokyo flat, Sydney gaining 0.4 percent, while Seoul won 0.37 percent.
US stocks headed solidly higher in opening trade following gains in Europe's markets and on expectations the Federal Reserve will decide on more stimulus measures at its two-day policy meeting that begins Tuesday.
In afternoon trade the Dow Jones Industrial Average had gained 0.90 percent to 13,288.04 points.
The broad-market S&P 500 added 0.94 percent to 1,431.88 points, while the tech-rich Nasdaq Composite climbed 1.40 percent to 3,028.87 points.