Shares in Vodafone closed 2.89 percent higher after the Financial Times reported that Verizon Communications and AT&T were working together in a multi-million pound joint bid for the U.K. heavyweight, citing unnamed sources. Shares in other European telecom companies like Deutsche Telekom and Telecom Italia also got a boost.
Vodafone has been at the center of deal speculation for months, linked to its 45 percent stake in Verizon Wireless.
"If Verizon and AT&T came in with a break-up bid for Vodafone, that would be a classic example of exactly the kind of cross-border M&A thesis which we think is coming over the next months," Exane BNP Paribas's head of equity strategy, Ian Richards, told Reuters.
"Anything such as this which helps investors really focus on the underlying value appeal and what something is intrinsically worth, I think, is clearly good news for share prices."
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The pan-European FTSEurofirst 300 Index unofficially closed up 1.3 percent, or 15.02 points, at 1,203.94 points, with Vodafone accounting for nearly 1 point of the index's rise.
Europe's upward trend remained largely unaffected by euro zone PMI data that showed manufacturing fell deeper into decline in March. However, the sector's contraction was less than markets' feared, showing trouble in Cyprus has not yet had a significant impact.
Cypriot Finance Minister Michael Sarris quit on Tuesday after completing talks with foreign lenders on a 10 billion euro ($12.8 billion) bailout deal. The news came after Cyprus partially relaxed the capital control measures it implemented to prevent a run on the country's banks.
In addition, Dow Jones reported on Tuesday that international lenders are giving Cyprus extra time to meet its budget targets. According to a draft agreement, lenders are giving Cyprus until 2017 – an extra year - to achieve a budget surplus target of four percent.
In Italy, center-left leader Pier Luigi Bersani told reporters his bid to form a government was over, after he failed to gather enough support to win a confidence vote.
Meanwhile, President Giorgio Napolitano met with advisers in Rome on Tuesday, in an attempt to establish a cross-party consensus on basic economic reforms. The so-called group of ten "wise men" includes a central bank official, lawmakers and politicians from the center-left and center-right blocs,
Italy has been leaderless since an inconclusive election in February in which no political party won enough seats to govern independently. Bickering between politicians has prevented any alliances being formed so far, preventing much-needed reforms from taking place.
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Unemployment data for the euro bloc was also released on Tuesday, and showed that joblessness was at its highest rate since 1995. 19.071 million were out of work in February, amounting to 12 percent of the euro zone workforce.
In stocks news, Italy's Banca Monte Paschi di Siena (Monte Paschi) reported worse-than-expected losses for 2012 on Tuesday. Shares shed 6.3 percent before Consob, the Italian market watchdog, implemented a two-day short-selling ban on the stock.
Shares in French car companies like Peugeot Citroen and Renault closed lower after data released on Tuesday morning showed car registrations in France fell 16 percent year-on-year in March. Shares in other European car makers such as Fiat were also hit.
AstraZeneca, Britain's second-biggest drugmaker, suffered a setback on Tuesday when a U.S. court decided that a patent protecting its Pulmicort Repsules asthma treatment was invalid. AstraZeneca is already suffering from a fall-off in sales due to a raft of patent expiries, and announced around 1,600 job cuts in March.
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Basic resources was the only sector to closed in the red on Tuesday, hit by demand worries after disappointing manufacturing data from China and the U.S., as well as from Europe. U.S. factory data for March came in weaker-than-expected on Monday, while Chinese manufacturing activity failed to a show a strong revival in growth.