European shares rose on Tuesday on anticipation that the European Central Bank's second round of cheap long-term loans tomorrow would further ease balance sheet pressure among banks.
Investors also took encouragement from a year-high in German consumer confidence data.
Banks, many of which suffered heavy writedowns on their holdings of government debt in the euro zone, were among the top performers, with the STOXX Europe 600 Banks index up 0.4 percent.
Italy's UniCredit, France's Societe Generale and Germany's Commerzbank were up between 1.6 and 2.7 percent.
The banking index is up 17 percent this year after the ECB doled out about half a trillion euros in cheap, long-term loans to them in December, and have recouped around half of the falls they made last year.
The banks are expected to take another 500 billion euros ($670 billion) from the second round of the longer term refinancing operation (LTRO), though forecasts in a Reuters poll of money market traders ranged from 200 billion to 750 billion euros.
"The market is anticipating a good result on the LTRO; it adds some liquidity to the market, and there are lots of strategists that think this will push stocks higher," said Koen De Leus, strategist at KBC Securities.
"It is just a sign that banks still can not go to the interbanking market to get loans and it is probably the last operation for a while. I would not get my hopes up on a strong rally, the market could still go down 5-10 percent," De Leus said.
Gains were limited, however, after Standard & Poor downgraded Greece's long-term rating to "selective default".
High oil prices are also a drag on the market, De Leus said, putting further strain on the economies of Europe. Though Brent crude had slipped below $124 a barrel on Tuesday, it is still up more than 20 percent since mid-December.
By 0935 GMT, the pan-European FTSEurofirst 300 index of top shares was up 0.2 percent at 1,076.24 points and has gained 7.3 percent so far this year.
Buyers also came for French automaker PSA Peugeot Citroen , which jumped 8 percent to the top spot on the French CAC after sources said General Motors was in advanced discussions to buy a small stake.
FUND MANAGER POSITIONING
Veronika Pechlaner, a fund manager on the Ashburton European equity fund said she was taking a "balanced approach" to equities, but was becoming more positive due to strong economic data out of the United States and the LTRO.
"We are sticking to key financial positions because of LTRO and wary about investing in the euro zone peripheral markets," she said.
Ashburton is holding names like Tullow Oil because of the higher oil price and cement maker HeidelbergCement due to its exposure to the United States, where the housing market is showing signs of improving.