Investors set aside worries over the growth outlook and Spain's debt problems on Monday, taking fresh positions in European equities at the start of the new quarter and selling safe-haven German bonds.
Even evidence that the euro zone's economy is heading for the second recession in three years failed to dampen demand. Investors are hoping aggressive central bank action to boost economic activity will soon kick in.
The FTSEurofirst 300 index <.FTEU3> of top European shares, which lost 2.7 percent last week, was up one percent in morning trade at 1,100.35 points.
There were also big gains in the German Dax <.GDAXI>, which was up 1.3 percent, the British FTSE index <.FTSE>, up 1.1 percent, and the French CAC 40 <.FCHI> which rose 1.6 percent.
"We are in a new quarter and seeing some fresh buying across the board. Given the background that we have at the moment, with incredibly low interest rates, equities are being seen as the value proposition and it's hard to get too bearish," Paul Kavanagh, partner and equity strategist at Killik & Co, said.
The gains in European markets came as a new business survey showed the euro zone manufacturing sector has put in its worst performance in the three months to September since the depths of the financial crisis.
"The sector will act as a severe drag on economic growth. It therefore seems inevitable that the region will have fallen back into a new recession in the third quarter," said Chris Williamson, chief economist of the data collator Markit.
The euro even bounced off a three week low after the European data came out to be slightly higher on the day at $1.2865, and up from $1.2804 hit early in Asian trade.
The latest data on Europe followed weak readings from other surveys in China and Japan and a sharp fall in exports during September from South Korea, the world's seventh-largest exporting nation.
However, the reports cover the period when major central banks, in particular the U.S. Federal Reserve, moved aggressively to ease monetary policy - action which has yet to impact on economic activity.
The European single currency and other euro zone asset markets were expected to come under renewed pressure as the focus swings back onto Spain, which is seen as likely to need international help to meet its debt financing needs.
Some in the markets expect the trigger for a bailout to be pulled when ratings agency Moody's announces its latest review of Spain's sovereign rating which may see Europe's fourth-largest economy downgraded to junk status.
"We will see the euro head lower until Spain applies for a bailout and the probability of that happening could rise if Moody's downgrades Spain," said Adam Myers, senior foreign exchange strategist at Credit Agricole.
But with no news from Moody's on Monday morning, Spanish bond yields were falling and investors were selling safe-haven German government bonds on relief that a recent audit of banks showed extra capital needs were no worse than forecast.
Spanish 10-year yields were six basis points down at 5.92 percent with 5-year yields down by a similar amount at 4.93 percent.
German 10-year yields, which gain as prices fall were up 3.5 basis points at 1.464 percent.
Commodity markets better reflected the prospect of slower global demand coming from the weaker economic data, with Brent crude falling below $112 per barrel in early trade.
However, that comes after it closed the third quarter with its biggest three-month gain in 1-1/2 years.
Gold also drifted lower suffering not just from the weaker economic data but also a stronger U.S. dollar, which makes the precious metal less attractive to investors.
The dollar has climbed to its highest levels since mid-September against a basket of currencies <.DXY> following news that currency speculators had boosted their bets against the greenback to the highest level in more than a year in the week ended September 25.
Spot gold was down 0.3 percent to $1,766.10 an ounce although it to was coming off a strong last quarter when it rose nearly 11 percent, its biggest quarterly rise since the second quarter of 2010.
(Additional reporting by Anirban Nag and Atul Prakash; editing by David Stamp and Anna Willard)