European stocks rallied by 3.2 per cent in late trade yesterday, driven by financials after US billionaire investor Warren Buffett offered to take on $800 billion worth of debt insured by top bond insurers.
HSBC was the top positive influence on the broader market, rising 3.4 per cent, while UniCredit gained 5.1 per cent and Barclays rose 5.3 per cent.
The FTSEurofirst 300 index of top European shares was up 3.2 per cent at 1,332.1 points, on track for its largest daily rise since January 22.
"A lot of this looks like a bear squeeze. I don't get the feeling that many people are buying for the long run but it is more momentum-led across every sector. Buffett's comments were the main catalyst," one trader said.
Further supporting the financial sector was a separate plan by six top US mortgage lenders and services to help homeowners with poor credit avoid foreclosure.
European stocks were already higher midday as automobile shares rallied after a better than expected reading for an economic sentiment indicator in Germany, the continent's largest economy and a major car manufacturer.
"There's strong buying interest in Daimler," one Frankfurt-based trader said, referring to the German maker of Mercedes-Benz cars, whose shares were up 3.3 per cent.
Shares in French carmaker Peugeot rose 3 per cent after WestLB upgraded its recommendation on the stock to "add" from "hold", saying its recent weakness was overdone. German truckmaker MAN rallied four per cent.
The DJ Stoxx European autos index was up 2.9 per cent, topping the sectoral leaderboard, having fallen nine per cent between Februar 4 and February 11.
Firm prices of precious and base metals prices underpinned mining companies' shares, and higher oil prices lifted energy stocks.
By 1230 GMT, the FTSEurofirst 300 index of leading European shares was up 1.1 per cent at 1,305.27 points, helped by US stock index futures, which turned positive after trading in the red earlier in the day.
German investor morale improved in February for the first time since May 2007, suggesting the pivotal eurozone country may weather the turbulence buffeting financial markets and bounce back later this year.
The Mannheim-based ZEW research institute's economic sentiment indicator, based on a survey of 314 analysts and institutional investors, rose to minus 39.5 from minus 41.6 in January, bucking market expectations for a fall. Insurance and banking shares, Monday's leading losers, recouped most of their morning losses, with traders attributing the recovery to comments from Dutch banking and insurance group ING that it was "aware of its obligations to report any material deviations" when asked about market talk of large writedowns that had the stock down more than six per cent.
ING's shares recovered to stand down 1.1 per cent.
Shares in Credit Suisse eased 0.6 per cent after the Swiss bank scaled back its full-year 2007 subprime writedowns but also reported a 49 per cent fall in fourth-quarter profit. Subprime write-downs in the fourth quarter were 1.26 billion francs, Credit Suisse said.
"These write-downs are towards the higher end of expectations, and importantly, there is still significant residual risk left on balance sheet," Goldman Sachs analysts said in a research note.
Sentiment towards financial sector stocks took a hit on Monday as auditors of American International Group, the world's largest insurer, said the company failed to account properly for derivatives related to risky debt known as collateralised debt obligations (CDOs).
"The read-across to European insurance from AIG's travails is limited to Swiss Re," Fox-Pitt Kelton said in a research note.
"Swiss Re is the only European insurer known to have written comparable CDS (credit default swap) protection on subprime-related underlying assets, and its current notional exposure of around $1 billion is less than five per cent of AIG's net notional," Fox-Pitt Kelton said.
Given that its exposure is widely appreciated and of a considerably lower magnitude, this should not be a significant cause of concern," it added.
Swiss Re shares fell 1.2 per cent.
Higher metals prices boosted mining shares, with BHP Billiton up three per cent, Rio Tinto advancing 2.9 per cent, and Anglo American rising 2.3 per cent.
But Xstrata fell 1.5 per cent after the Financial Times reported that the Anglo-Swiss miner had rejected a cash-and-shares takeover approach from Brazil's Vale pitched at just under 40 pounds a share, or £39 billion.
Among energy shares, Italy's ENI advanced 2.7 per cent, French Total rose 2.1 per cent, and Royal Dutch Shell was up 1.8 per cent, as crude oil held near $94 a barrel.
JPMorgan reiterated its "overweight" rating on ENI, saying the shares looked cheap and traded at a discount to rivals, despite offering the sector's highest dividend yield. Norway's Renewable Energy Corporation (REC) rose 10.7 per cent after the solar industry group reported a bigger-than-expected rise in fourth-quarter core profit.