The promise of a solid open on Wall Street after Wal-Mart signaled the U.S. consumer is still keen to spend helped set aside worries about hefty bank writedowns on Tuesday while oil and metal prices rose unabated.
Platinum reached a new all-time high and gold climbed. Oil gained nearly $2 a barrel. The dollar was weaker against a basket of major currencies.
Investors' attention in Europe was focused early on the banking sector with sharp reminders from Barclays and Credit Suisse that the subprime mortgage crisis triggered last year is not over.
Barclays said it was raising its 2007 writedown on the value of risky assets to 1.6 billion pounds ($3.12 billion). Credit Suisse said it had marked down the value of asset-backed investments by $2.85 billion.
Gloomy sentiment shifted and stocks reversed earlier losses, however, after Barclays gave what dealers said was an upbeat presentation about the future and as Wall Street prepared to open strongly after Wal-Mart Stores Inc reported quarterly results that topped analysts' expectations.
Any time the world's largest retailer shows better-than-expected earnings, it shows the consumer is not completely dead, said Edward Bretschger, director of equity sales and trading at Calyon Securities in New York.
Any signs of life really bode well for the economy and market in general. Wal-Mart is the ultimate litmus test for the consumer.
The pan-European Eurofirst 300 was up 0.5 percent after earlier losing more than 1 percent.
Investors have been concerned that the U.S. economic slowdown will become deeper and more prolonged if consumers stop spending. Equities were lifted last week when U.S. retail sales gave a positive surprise.
Elsewhere on Tuesday, MSCI's main emerging market index .MSCIEF was up 1.1 percent for a month-to-date gain of 3.1 percent.
Japan's Nikkei index climbed to a two-week high on demand for shares in commodity trading houses and exporters. The benchmark hit 13,853, its highest since February 5, before paring gains to close at 13,757.91, a rise of 0.9 percent.
Demand for metals continued. Platinum surged to a record high for the 14th straight session as supply fears persisted after power shortages in South Africa disrupted production.
The metal, mainly used in autocatalysts and jewellery, touched a record high of $2,160 an ounce in Europe.
Gold was touching $920, partly due to a weaker dollar. The U.S. currency sank to a two-week low against the euro and fell against the yen while increased expectations of a rise in Australian interest rates boosted high-yielding currencies.
We are seeing euro/dollar rallying as people continue to price in expectations of more negativity on the U.S. macro side, and the prospect of more rate cuts, said Jeremy Stretch, strategist at Rabobank.
The euro was up 0.6 percent at $1.474, around its highest in two weeks. The dollar was down 0.6 percent against the yen at 107.53 yen.
Euro government bond prices were higher as equities fell.
The two-year Schatz yield was 4 basis points down at 3.17 percent while the 10-year Bund was yielding 3.99 percent, down 2 basis points.
(Editing by Ruth Pitchford)