European blue-chips rallied yesterday to within touching distance of 16-month highs, boosted by steel makers on expectations of strong demand this year, while auto makers lent support as the dollar bounced.
But energy stocks slipped on worries about a possible US enquiry into overbooking of reserves by Shell.
The FTSE Eurotop 300 index of pan-European blue chips closed up 0.89 per cent at 979.39 points, just off the 16-month high of 982.05 set last week. Amid good volumes, winners outnumbered losers around four to one.
The narrower DJ Euro Stoxx 50 index gained 0.98 per cent to 2,829.54 points.
"We continue to be aggressively overweight in equities, relative to bonds," said Joerg Kraemer, chief strategist at Invesco Asset Management.
"European equities excluding the UK are still undervalued despite the strong uptrend in prices we've seen since Spring 2003... one risk is further dollar weakness."
Until recently the global economic recovery has offset the euro's strength, but its rise to a lifetime high of $1.2898 on Monday has worried investors as it erodes the competitiveness of dollar-earning companies.
It has since dropped back and breathed new life into auto makers like Volkswagen, which after strong sales news in China supported the European stock rally yesterday.
Germany's Volkswagen was up 3.4 per cent, BMW rose 1.7 per cent and DaimlerChrysler gained 1.4 per cent.
German auto makers and steel giant ThyssenKrupp, up 3.6 per cent, helped Frankfurt's benchmark Dax index gain 1.4 per cent to 4,055.2 points.
News of progress in setting raw material costs and expectations of rising prices this year boosted steel firms.
Anglo-Dutch Corus jumped 8.5 per cent and the world's biggest steel producer France's Arcelor rose 3.9 per cent.
France's CAC ended one per cent higher at 3,612.5 points, Britain's FTSE picked up 0.5 per cent to 4,461.4 and the Swiss SMI was up 1.2 per cent at 5,624.3.
An unexpected drop in the November US trade deficit coaxed the dollar higher. But the gains could be short-lived.
"Will the dollar continue to fall? In our view, yes," said Dresdner Kleinwort Wasserstein. "A large US current account deficit and (US presidential) elections in November this year make a weak dollar a desirable outcome for the US government."
The blue-chip Dow Jones industrial average was up 0.7 per cent at 10,503.5 points and the technology-heavy Nasdaq Composite Index was up 0.6 per cent at 2,106.9.