European stocks rose on Thursday in brisk volume, as strong demand and falling yields at Spanish and French debt sales soothed worries over the euro zone debt crisis and triggered sector rotation out of defensives and into banks.
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European banks are major holders of euro zone sovereign debt.
Commerzbank, which unveiled steps to beef up its capital buffer, was up 12 percent.
"The negative correlation between euro zone stocks and the region's sovereign debt yields has never been so strong. It's almost like a mirror," said Emmanuel Bourdeix, head of equities at Natixis Asset Management, which has 525 billion euros ($677 billion) under management.
"The direction of yields over the next few months will be crucial for the direction of the region's equities."
At 1200 GMT, the FTSEurofirst 300 index of top European shares was up 0.3 percent at 1,038.10 points in strong volume, while the euro zone's blue-chip Euro STOXX 50 index was up 0.7 percent at 2,407.05 points.
The Euro STOXX 50 was breaking above a crucial resistance level it has been testing for three days, a peak at 2,402 points hit in early December.
The benchmark index's next key resistance level will be at around 2,468 points, which represents its 200-day moving average as well as the 61.8 percent Fibonacci retracement of the late July to late September 30 percent nosedive.
Yields dropped and demand was solid at France's bond sale on Thursday, the country's first auction since Standard & Poor's stripped the country of its AAA credit rating, while Spain sold far more longer-term debt than expected, with yields down more than 150 basis points from a previous sale of the same bonds in November.
"These results are bullish for both Spain and the broader periphery, and stand to further underpin the ongoing 'risk-on' tone," said Richard McGuire, rate strategist at Rabobank, in London.
"Potential snags as regards Greece's PSI (private sector involvement) deal and Italy's surge in redemptions from February both, however, leave a question mark over how sustainable this positive trend will be.
"For now, though, the glass half-full brigade have the upper hand."
Greece and its bondholders have made little progress since resuming stalled talks on a debt swap, sources close to the talks told Reuters, with time to strike a deal and avoid a messy default running out rapidly.
Nearly a week after talks hit an impasse, the two sides remain bogged down over the coupon, or interest payment, that Greece must offer on its new bonds in the swap.
Italy is due to sell five- and 10-year bonds at the end of the month.
On longer maturities, demand from foreign investors plays a bigger role, although analysts have said the country would be able to shift only part of its funding burden to the short term ahead of a second, three-year liquidity tender by the European Central Bank at the end of February.
Around Europe, UK's FTSE 100 index was up 0.3 percent, Germany's DAX index up 0.2 percent, France's CAC 40 up 0.9 percent, Spain's IBEX up 1.1 percent and Italy's FTSE MIB up 1.2 percent.
The Euro STOXX 50 volatility index, Europe's yardstick of investor sentiment known as the VSTOXX, was down 2.2 percent at 27.2, flirting with levels last seen in early August, signalling a rise in investors' appetite for risky assets.
The 'risk on' mood sparked a sharp sector rotation, with shares of banks and insurers pacing the gains while investors dumped defensive utilities, pharmas and telecoms.
E.ON fell 2.8 percent, AstraZeneca dropped 1.5 percent and Belgacom shed 1.3 percent.