European shares rebounded from seven-month lows to close higher on Tuesday afternoon. Investor sentiment was boosted after the Chinese central bank held a press conference to try to allay fears of a credit squeeze in the country.
The pan-European FTSEurofirst 300 Index provisionally closed 1.4 percent higher on Tuesday at 1,129.90. The index had shed 5.5 percent in the previous three sessions, because of fears about the Federal Reserve ending its asset purchasing program, and about the possibility of a credit crunch in China.
In Europe and Asia, shares pared steep losses after the People's Bank of China (PBoC) press conference. The PBoC said that tight liquidity was the result of seasonal factors, which would gradually fade. Liquidity management would help keep lending growth at a reasonable level, it added.
(Read More: China Central Bank Will Guide Market Rates)
"We have had a decent turnaround in European share markets on Tuesday, pulled up by a late-recovery in Asian markets after the Chinese central bank attempted to assuage recent market fears about the soaring cost of funding Chinese banks," Ishaq Siddiqi, a market strategist at ETX Capital, said in a research note.
"That said, it is unlikely the PBoC's comments are the sole driver behind the European market recovery, as traders still remain unconvinced by the central bank and would rather welcome action in the shape of intervention with liquidity injections before the situation gets out of control."
Traders also took comfort from comments by Fed policymakers, which downplayed the potential impact of scaling back the U.S.'s asset purchase program.
On Monday, Dallas Fed President Richard Fisher said he advocated reducing the central bank's stimulus program, but stressed it should be done gradually. Minneapolis Fed President Narayana Kocherlakota said markets were wrong to view the central bank as having become more hawkish, and emphasized that policy would remain accommodative "for a considerable time" after the end of quantitative easing.
European markets also got a boost from upbeat U.S. economic data on Tuesday, which lifted Wall Street.
U.S. home prices jumped 1.7 percent in April, according to the S&P/Case Shiller index, and sales of new homes rose to their highest level in nearly five years in May, according to the Commerce Department. In addition, data from the Conference Board showed consumer confidence surged to its highest level since January 2008. Plus, durable goods orders rose in May,
Milan's FTSE MIB was the only major European country index to close lower, after the Daily Telegraph newspaper cited a private note from Mediobanca which said that its "index of solvency risk" for the country was flashing warning signs. According to the newspaper, Mediobanca analyst Antonio Guglielmi said that "time is running out fast" for Italy.
In Greece, Prime Minister Antonis Samaras reshuffled his cabinet late on Monday, in the hope of strengthening the ruling coalition, after one party quit in protest over the closure of state TV. Greek stocks traded higher on Tuesday and 10-year government bond yields, which had spiked above 11 percent, eased a little.
(Read More: Greek PM Reshuffles Cabinet to Overcome Crisis)