European stocks rose and the euro stayed under pressure on Tuesday as investors weighed the debt turmoil in the euro zone against an improved U.S. economic picture that looks set to deliver upbeat corporate results.
European shares gained from the start on Tuesday, led by mining stocks after forecast-beating results from U.S. aluminum producer Alcoa improved the outlook for commodities.
"A good start to the earnings season; it shows the demand outlook is not so bad and we could get more positive surprises," Mike Lenhoff, chief strategist and head of research at Brewin Dolphin Securities, said.
The key FTSEurofirst 300 index was up 1.3 percent at 1,021.47 points, while the STOXX Europe 600 euro zone banking index gained around 2.0 percent.
Nervous currency markets remained focused on the outlook for the euro zone economy, upcoming government debt sales and how the region's banks will raise much needed capital to repair their balance sheets.
The euro rose slightly to trade around $1.2792 , holding firmly above the 16-month lows of $1.2666 hit on Monday, due mainly to traders buying back the currency to square their positions after recent heavy selling.
The Bank of France focused attention on the ailing euro zone economy by reporting growth had stalled at zero in the fourth quarter of 2011 in the region's second-biggest economy.
But separate data showed French industrial production rose 1.1 percent in November, bucking expectations for no growth as output from refineries rose from weak levels of a year ago during strikes.
"There's short-covering and a bit of risk appetite with positive equity markets overnight," said Niels Christensen, currency strategist at Nordea in Copenhagen.
"But we have the debt auctions, the ECB meeting on Thursday and it's still a weak and vulnerable euro..., with no sign of a quick solution to the debt problems in the euro zone," he said.
The worries about the health of the region's banks saw commercial lenders' overnight deposits held at the European Central Bank hit another record high of 482 billion euros.
The banks are awash with cash after taking an unprecedented 489 billion euros in the ECB's first-ever three-year liquidity operation late last month, but they are still uncertain about what to do with the money in the longer term.
French banks were also likely to be in the spotlight after an internal memo obtained by Reuters on Monday showed Societe Generale is forecasting a sharp drop in investment bank revenue in 2012, weighed by higher funding costs and efforts to slash its balance sheet.
Earlier, data showed China's exports and imports grew at their slowest pace in more than two years in December. The figures fuelled expectations of more policy action from Beijing to support the world's second biggest economy, and most Asian markets gained on Tuesday.
Wall Street ended slightly higher on Monday in a light-volume session as investors stayed cautious ahead of the earnings season that kicked off with Alcoa.
Tuesday's focus in euro zone debt markets will mainly be on Austria's auction of 1.3 billion euros of 10-year bonds which should give an indication of how worried investors are about the country's exposure to neighbouring Hungary, which is locked in a dispute with the IMF over international aid.
Bund futures were were slightly lower in midmorning trade.
Elsewhere, British retailers finished 2011 with the best sales growth in months as hefty discounting lured in shoppers, while weak business a year earlier flattered the figures, the British Retail Consortium said on Tuesday.
It added that it expected another tough year.