Software giant SAP led European shares to a fifth straight higher close yesterday, but comments from Federal Reserve Chairman Alan Greenspan that he would do "what is required" to curb inflation kept gains in check.
SAP rose 2.5 per cent to €135.95, adding to gains made on Monday after the company and top-ranked software firm Microsoft confirmed they had held merger discussions.
SAP was also added to JP Morgan's model portfolio on expectations software companies will benefit from a late pick-up in the technology recovery cycle.
Carrefour, the world's second largest retailer, was a soft spot, falling 1.5 per cent to €39.54 after warning that sales at its hypermarkets in France would remain weak this quarter, before picking up.
The FTSE Eurotop 300 index of pan-European blue chips closed 0.3 per cent firmer at 1,003.3 points on light turnover of around €2.3 billion.
The narrower DJ Euro Stoxx 50 index ended flat at 2,800.4 points.
Stocks have been trading in tight ranges in recent weeks as investors fret about the impact of high oil prices and rising interest rates, despite strong profitability and a surging global economy.
"We remain in the economic sweet spot for corporate profitability and booming global demand is providing a background for a commodity as well as an equity bull market," said Mark Tinker, a strategist at independent broker Execution.
"The next phase of this business cycle involves a greater focus on margins than sales and the ability to increase prices (and) pass through costs will be key both for inflation and profits."
Greenspan repeated earlier views that the US Federal Reserve expects interest rates can rise gradually to control inflation but said the strong rebound in US profits showed evidence of a recovery in pricing power.
The Fed would do "what is required" to keep price rises in check if its views turned out to be wrong, he added.
"The comments are within the market's radar screen and not moving away from gradualism.
"He's setting the agenda that if inflation starts to accelerate, then they will come out with aggressive rate responses," said David Brown, chief European economist at Bear Stearns investment bank.
Markets expect the Fed to begin tightening monetary policy at the end of the month, lifting rates from 46-year lows of one per cent.
In New York, the blue-chip Dow Jones industrial average was steady at 10,389.5 points, while the Nasdaq Composite Index fell 0.2 per cent to 2,015.7 points at 1615 GMT.
Around Europe, London's FTSE 100 closed 0.3 per cent firmer and Zurich's SMI ended 0.2 per cent weaker. Paris's CAC-40 and Frankfurt's DAX both closed flat.
The energy sector was strongest as oil groups were supported by early gains in crude oil prices after news of further disruption to Iraq's oil exports and the threat that a strike in Nigeria could disrupt its flow to a tight international market.
Crude prices dipped late in the session as dealers booked profits.
Among the oil companies, Italy's ENI rose 0.8 per cent to €17.19, while Britain's BP was up 0.7 per cent at 493 pence.
Mobile phone giant Vodafone rose 1.6 per cent to 128 pence on hopes the company could cut its tax liabilities amid reports the firm plans to write down as much as €50 billion relating to its acquisition of Germany's Mannesmann in 2000.
Budget airlines remained under pressure on fears that stiff competition and high fuel prices will hurt earnings.
Ryanair tumbled 4.1 per cent to €4.5, while rival easyJet fell 2.5 per cent to 159-1/2 pence after Credit Suisse First Boston slashed its target on the stock to 155 pence from 291 pence.