The European markets rose for the first time in three days on Tuesday, as a report showed that German economic sentiment improved after the surprising economic recovery in the second quarter boosted investors' confidence.

The Mannheim-based ZEW Center for European Economic Research said its German economic sentiment indicator rose sharply to 56.1 in August, the highest since April 2006, from 39.5 in July, above the expected reading of 45.

The U.S. Commerce Department said in its report that housing starts fell 1.0% to an annual rate of 581,000 in July from the revised June estimate of 587,000. Economists had expected starts to rise to 598,000 from the 582,000 originally reported for the previous month.

The U.S. Labor Department revealed that producer prices dropped 0.9% in July. This followed an advance of 1.8% in the previous month. Economists had expected the measure to slip 0.3%.

Core prices, which exclude the volatile food and energy sectors, ticked down 0.1% in July. Economists were looking for core prices to edge up by 0.1%.

Crude for September delivery rose $1.69 to $68.44 a barrel on the New York Mercantile Exchange, by the time the European markets closed.

The FTSEurofirst 300 index of pan-European blue chips closed 1.37% higher at 934.56 points, while the narrower DJ Stoxx 50 index rose 1.41% to 2,313.77 points.

Around Europe, the U.K.'s FTSE 100 index rose 0.88% to 4,685.78, while France's CAC 40 index surged up 0.91% to 3,450.69 and Germany's DAX index climbed 0.94% to 5,250.74.

Wienerberger, the world's biggest brickmaker, jumped 18% after the company extended factory closures and reduced output to lower costs.

Oil stocks gained after crude oil prices rebounded. BP, Europe's biggest oil company, rose 0.5%, while Total, the third biggest, climbed 1.4% and StatoilHydro, Norway's biggest oil company, surged up 1%.

Rio Tinto, the world's third biggest miner, rose 1.7% after the company agreed to sell its Alcan packaging unit to Australia's Amcor for about $2 billion.

HSBC, Europe's largest bank, gained 2.8% after Goldman Sachs upgraded the stock to buyfrom neutral.

Swedbank, Sweden's biggest lender, jumped 12.6% after Deutsche Bank upgraded the stock to hold from sell.

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