Major retail stocks led European shares higher on Thursday after three days of losses, although traders said a rating cut for Spain could peg back markets to the tight trading range seen in the last month.
The FTSEurofirst 300 index rose 0.5 percent to 1,093.58 points, while the euro zone Euro STOXX 50 index also recovered from earlier losses to rise 0.4 percent to 2,462.48 points.
Continue Reading Below
Fears over Europe's sovereign debt crisis were highlighted when Standard & Poor's downgraded Spain late on Wednesday, adding to pressure on Madrid to seek a sovereign bailout.
The downgrade pushed up Spanish bond yields and those of fellow euro zone struggler Italy, and Spain's IBEX stock market fell 0.4 percent.
Some investors shrugged off the S&P cut, saying they had been factoring in such a move for some time, and that European equities appeared attractively valued despite the tough climate facing the region's companies.
"Yes, the earnings outlook is difficult, but the European market does look very cheap," said Neil Wilkinson, European equities fund manager at Royal London Asset Management.
According to Thomson Reuters Starmine data, companies in the European STOXX index have an average price-to-earnings (P/E) ratio of 10.5 for 2013 - a cheaper rating than a corresponding 2013 P/E ratio for the U.S. S&P 500 index.
BURBERRY PUSHES UP LUXURY GOODS STOCKS
French luxury goods group LVMH added the most points to the FTSEurofirst 300, with LMVH rising 3 percent on the back of a 8.6 percent gain at its British rival Burberry .
Burberry, whose shares slumped after a profit warning last month, reported a rise in first-half underlying revenues.
"With a very strong retail space opening programme ahead, Burberry looks likely to deliver a solid performance for the year as a whole," Mirabaud analyst Steve Clayton wrote in a note.
French supermarket retailer Carrefour also rose 3.4 percent after reporting that sales in its core French market were improving, while its Brazil business remained strong.
The underlying economic uncertainty has meant many investors have favoured "defensive" stocks - companies seen as the most resilient to the economic slowdown and often with a large global reach - to more "risky" sectors such as banks or miners.
Royal London Asset Management's Wilkinson said he was relatively "underweight" on financial stocks, preferring more defensive plays.
Cyrille Urfer, head of asset allocation at Swiss bank Gonet, also preferred such "defensive" stocks, and northern European equity markets over those in debt-ridden southern European.
"We are still avoiding southern European equities, we're sticking more to core European equity markets such as the UK," said Urfer.
The FTSEurofirst 300 index is still up by around 8 percent since late July, when European Central Bank head Mario Draghi pledged to do "whatever it takes" to protect the euro from the effects of the region's debt crisis.
But European stocks have failed to make much ground over the last month, trading in a tight 100 point range and with the FTSEurofirst 300 falling from a year-high of 1,122.76 points reached in mid-September.
This has been due to uncertainty over when Spain may request an eventual bailout package.
Adrian Slack, head of equities at Bastion Capital, expected European equity markets to be under pressure this month, adding that the Euro STOXX 50 could fall to around 2,396 points, while Germany's DAX could go down to the 7,151 point level.