European stock markets closed higher Tuesday, extending gains as a very strong lead from Wall Street helped calm fresh concerns that France's top credit rating could be at risk.
Dealers said consistently strong data from Germany, Europe's powerhouse economy, was driving the upturn as investors allowed themselves some New Year cheer after all the doom and gloom over the eurozone debt crisis.
In the afternoon, a much better-than-expected US manufacturing report drove US stocks up sharply, reinforcing the view that the US economy is in reasonably good health, especially after an uptick in Chinese factory activity.
The debt crisis has not gone away -- bad Spanish employment and public deficit figures ensured that -- but there are some more positive glimmers of light on the corporate front, dealers said.
In London, the FTSE index of leading companies closed up 2.29 percent at 5,699.91 points. In Paris, the CAC-40 index gained 0.72 percent at 3,245.40 points and in Frankfurt the DAX 30 added 1.50 percent to 6,166.57 points.
Milan put on 1.24 percent but Madrid inched up just 0.10 percent as the poor data dented sentiment.
In foreign exchange deals, the European single currency rose sharply to $1.3055 from $1.2934 late Monday. It hit a 15-month low last week at $1.2858 on eurozone debt crisis concerns. The euro was at 100.10 yen, regaining the key 100 yen level, from 99.46 yen on Monday.
In New York, stocks opened the new year with a bang after Monday's public holiday as the Institute for Supply Management's manufacturing index hit 53.9 in December, up 1.2 points from November for the fastest rate in six months.
Other data showed that US construction spending increased 1.2 percent in November, again better-than-expected, adding to the positive tone.
The blue-chip Dow Jones Industrial Average was up 1.83 percent at around 1700 GMT and the tech-rich Nasdaq Composite put on 1.92 percent.
"Stocks are holding their gains in the wake of a couple of doses of data. Both proved better than expected," said analysts at Briefing.com.
The market looks set to "to begin 2012 on a strong note, notwithstanding building geopolitical tension in and around Iran that has helped boost oil prices back above $100 per barrel," said Patrick O'Hare at Briefing.com.
"The bullish bias comes on the heels of none other than better-than-expected economic data," he said.
Oil prices put on more than two dollars as tensions mounted in the Gulf where Iranian military exercises sparked verbal exchanges with the West over the key global oil transit point.
The European markets got a strong boost from positive employment, consumer spending and manufacturing figures in Germany, Europe's biggest economy, which confirmed recent trends.
Spain however warned Monday that is 2011 budget deficit is now expected to come in well above target while data Tuesday showed very high unemployment continuing to rise, giving the new government an unpleasant New Year hangover.
Spain's jobless numbers rose for the fifth straight month in December to a new 15-year high even as Germany reported its lowest annual jobless rate in two decades at 7.1 percent.
"2012 is set to be the most challenging year since 2009, as the eurozone crisis continues to rage on, however the first trading sessions of the New Year have been surprisingly strong," said analyst Kathleen Brooks at Forex.com.
"Why the New Year cheer when the situation in the global economy is still so decidedly gloomy? The rally was sparked by some better, or in Europe's case some less worse, economic data."
In Asian trade earlier Tuesday, stocks were higher after China announced stronger-than-expected manufacturing data over the weekend.
Hong Kong jumped 2.4 percent, Sydney gained 1.1 percent and Seoul 2.69 percent. Financial markets in mainland China, Japan and Thailand were closed for holidays.