European shares rose on Friday in a broad-based rally as investors took advantage of the previous session's steep falls to pick up equities on the cheap, though traders cited some caution given weekend elections in Italy.
The pan-European FTSE Eurofirst 300 provisionally closed up 1.2 percent at 1,165.43, having sunk 1.5 percent on Thursday as uncertainty over the U.S. Federal Reserve's future monetary policy was compounded by disappointing news on the euro zone economy.
Brightening the mood on Friday, data showed German business morale surged at its fastest pace in over two years in February. The Ifo business climate index rose to 107.4, higher than a Reuters forecast of 105.0.
"The headline index saw its strongest monthly increase since July 2010, the expectation component the strongest monthly increase since July 2009. Nothing seems to be able to stop German business optimism," Carsten Brzeski, senior economist at ING Economic Research said.
The euro rose against the dollar after the data release.
"People are looking more relaxed today with the Ifo showing that at least for the German economy things are moving into the right direction," Gerhard Schwarz, strategist at Baader Bank, said.
"I think we are now in a kind of digestion phase going on for a couple of weeks, and after that I would expect a resumption of the uptrend."
Investors in Europe have been seeking protection against the risk that Italian elections next week could produce a political stalemate that will make fiscal reforms more difficult to implement.
Campaigning for votes has heated up in Italy in recent weeks with front-runner Pier Luigi Bersani and center-right candidate Silvio Berlusconi facing a serious challenge from comedian Beppe Grillo, who heads the "protest vote" with his "5 Star Movement."
Technocrat Mario Monti is in fourth place but is expected to be approached by front-runner Bersani to form a coalition. However, Grillo could overtake Berlusconi to move into second place, analysts say, causing a potential upset to the Bersani/Mario Monti coalition plan.
(Find out more in CNBC's Slideshow: Italy's Election: Tycoon, Clown or Professor)
On Friday, Germany reported fourth-quarter GDP declined 0.6 percent, in line with the flash estimate. Meanwhile, the European Commission reported the euro zone as a whole will not return to growth until 2014, blaming a lack of bank lending and record joblessness for delaying the recovery.