European shares climbed to their highest level in 14 months on Wednesday after Germany's Constitutional Court rejected complaints against the euro zone's new bailout fund and allowed its ratification under certain conditions.
Approval of the ESM is a vital part of a European Central Bank plan to defuse the euro zone debt crisis by buying struggling peripheral countries' bonds in the secondary market.
"It's all good news. The fear was they were going to say 'nein', so the 20 percent down in the market that we could have had is off the table," Gerard Lane, equity strategist at Shore Capital, said.
"The conditionality is quite light. The big statement to my mind was that the ESM is not against the German constitution."
At 0900 GMT, the FTSEurofirst 300 index of top European shares was up 0.5 percent at 1,113.15 points after rising as far as 1,115.90, its highest since July 2011.
Germany's DAX was up 0.7 percent, Spain's IBEX rose 1.2 percent and Italy's FTSE MIB gained 1.3 percent.
Investors bought cyclical sectors on expectations the court ruling would help in tackling the long-running euro zone debt crisis and bring back the region's economy back on a recovery path.
The STOXX Europe 600 banking index advanced 1.6 percent, insurers gained 1.4 percent and autos rose 0.9 percent.
"The market was expecting it to be ratified but with some conditionality, which seems to be the case," said Kevin Lilley, European equities fund manager at Old Mutual Asset Management.
"The conditionally that I've seen so far doesn't come as a great surprise ... It hasn't shocked the market in a negative sense and therefore it allows the market to move forward."
When it comes into effect, the ESM will be a 700 billion-euro firewall against the spread of the three-year-old debt crisis. Only German ratification is still pending.
Investors also focused on a two-day U.S. Federal Reserve policy meeting starting on Wednesday. Markets widely expect some type of new monetary stimulus to boost the U.S. economy.
Equities have rallied strongly since June, with the euro zone's blue chip Euro STOXX 50 index surging more than 25 percent, lifted by expectations of central bank action to revive economic growth and tackle the euro zone debt crisis.
The index was last up 0.8 percent at 2,577.00 points.