European equities closed higher on Tuesday after inflation data for the euro zone came in lower than expected, increasing the pressure on the European Central Bank (ECB) to announce stimulus measures at its policy meeting this week.
The pan-European FTSEurofirst 300 Index closed provisionally higher by 0.8 percent at 1319.54 points after a flat morning start, following an unexpected drop in unemployment in Germany.
In addition, Spanish stocks performed well for a second day after Monday's better than a expected PMI services sector data. Spain's IBEX index led the rally, closing higher by around 2.8 percent, with Bankinter rising 4.8 percent, Caixabank closing up around 7 percent and BBVA provisionally closing higher by 5.7 percent.
Consumer prices in the euro zone increase by 0.8 percent in December, according to data out on Tuesday morning. This missed expectations of a 0.9 percent rise and increased the likelihood of the ECB enacting the stimulus measures previously discussed. A rate decision and press conference by the ECB is due this Thursday, after its first policy meeting of the year.
(Read More: Euro zone inflation slips unexpectedly in December)
"While the ECB remains adamant that deflation across the euro zone is not a serious risk, it will undoubtedly be uncomfortable with this latest dip in consumer price inflation, which is over a percentage point below its target rate," Howard Archer, an economist at IHS Global Insight said in a research note.
Meanwhile, German unemployment fell in December on a seasonally adjusted basis, the first drop since July, the country's Labour Office confirmed. The number of people out of work fell by 15,000 to 2.965 million, the biggest decrease in two years.
US policy eyed
U.S. stocks traded higher on Tuesday, with the S&P 500 rebounding after a three-session slide, as investors looked to earnings reports and data on the labor market this week in measuring the state of the economic recovery.
U.S. Treasury Secretary Jack Lew started a series of visits to Europe this week. He visited France on Tuesday to meet President François Hollande and Finance Minister Pierre Moscovici to discuss policies to boost global growth and promote financial stability.
(Read more: US's Lew calls for European 'growth agenda')
His visit came after workers at a Goodyear factory in northern France held two managers captive in a dispute over the plant's closure. Eventually, police arrived to release the two men from the building.
Vestas Wind shares higher
In stocks news, a series of analyst reports moved individual stocks in different directions.
Shares of energy firm Vestas Wind closed higher by around 6.07 percent after HSBC lifted its target price on the Danish wind turbine maker.
Chemical company BASF saw its shares closed higher by roughly 2.75 percent after UBS raised its outlook on the firm to a "buy" from a "neutral".
Societe Generale, meanwhile, cut its outlook on Hugo Boss down to a "hold" from a "buy"; shares in the retailer finished the day lower by roughly 2.30 percent.
Citi downgraded Swedish Match to a "sell" from a "neutral"; shares in the tobacco product maker finished the day around 5.48 percent lower.
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