European equities closed higher on Wednesday, paring earlier losses, as investors bet on an imminent deal in Washington to avert a U.S. debt default and bring an end to the government shutdown.
The pan-European FTSEurofirst 300 Index provisionally closed up 0.1 percent, taking its lead from U.S. averages, which moved higher after Reuters reported that Senate negotiators were "very close" to announcing a deal.
The Senate is likely to move "quickly" to pass the fiscal debt deal currently being negotiated, according to a Senate aide. Senate leaders are in talks with House leaders to find a way to win fast passage of the deal in both chambers.
The New York Times reported that the deal is likely to be announced by midday, citing Senate aides.
Senate leaders are expected to continue negotiations at noon ET Wednesday, after a failed attempt in the House of Representatives to hold a vote on a short-term funding bill.
(Read more: Three things that worry Marc Faber more than DC)
"Just a day before the Treasury's new borrowing authority is set to expire, and, after yesterday's House effort predictably came to naught, the ball is now back in the court of the Senate to craft a compromise," Chris Scicluna, an economist at Daiwa Capital, said in a morning research note.
After the closing bell on Tuesday, Fitch credit rating agency placed the United States' triple-A rating on "rating watch negative", citing the debt ceiling gridlock.
Italy announces budget
In European news, the U.K's jobless rate — a key factor influencing the Bank of England's interest rate policy — held steady in the three months to August, but the number of people claiming unemployment benefits fell much more than expected.
(Read More: UK unemployment steady but claimant count plummets)
Inflationary pressures in the euro zone continued to ease, data showed on Wednesday. Consumer price inflation for the 17 countries that use the single currency fell to 1.1 percent (year-on-year) in September, its lowest since February 2010, according to Eurostat.
Car registrations in Europe posted a 5.4 percent (year-on-year) rise in September, highlighting a recovery in the continent, with impressive demand growth from southern European nations like Greece and Spain.
Italy's government unveiled its 2014 budget law on Tuesday, in which it lowered the tax rate on labor. After withdrawing planned cuts to the health care budget, Prime Minister Enrico Letta hailed it the country's "first budget without tax hikes or social cuts in year".
In stocks news, shares of France-based food producer Danone closed down 2.28 percent after announcing that an Asian recall of baby formula had made a worse-than-expected dent in revenues in its third quarter.
Luxury retailer LVMH posted a surprise slowdown in sales growth in its third quarter; shares closed down 4.25 percent, knocking shares in the sector. Hermes, Gucci-owner Kering and Burberry all closed down.
Shares of U.K.-based miner Hochschild Mining fell 1.57 percent after it said its first-half earnings had been hit by a fall in metal prices.
Also in the U.K., Smiths News released preliminary results for its full year showing a 14 percent rise in pre-tax profit; shares in the British newspaper and magazine distribution company rose by 8.25 percent
Shares in struggling French car maker Peugeot Citroen closed down 4.43 percent, extending losses. The stock has been knocked by mounting fears the company will need a large capital increase.
(Read More: Peugeot stock tumbles on rights issue reports)
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