European stocks rallied Tuesday afternoon, closing higher, with investors cheered by the prospect of a U.S. Federal Reserve rate cut and encouraged by the British government's intervention to reassure Northern Rock bank depositors.
The London FTSE-100 ,Paris CAC-40 and Frankfurt DAX were all higher. The FTSE CNBC Global 300 also rose.
U.S. stocks traded higher, with investors feeling cautious but optimistic on upbeat earnings from Lehman Bros, tame inflation data and an expected rate cut from the Federal Reserve.
The market is split evenly between expectations for a quarter-point and a half-point Fed rate cut, according to fed funds futures traded on the Chicago Board of Trade. The current fed funds rate stands at 5.25%.
U.K. Chancellor of the Exchequer Alistair Darling announced after trading Monday that all deposits in Northern Rock -- and other British banks if necessary -- -- were assured by government funds, a move designed to halt a bank run on the mortgage lender.
Shares of Northern Rock gained 8.2% following more than a 60% decline in value since Friday's open and Alliance and Leicester regained nearly all of the losses it suffered Monday, closing 32% higher.
"Really, it's been a strong day for the banking sector and I think it's set to continue if we don't see any bad news," Giles Watts, head of dealing at City Index, told "European Closing Bell."
The Bank of England's attempts to ease credit-related fears by injecting further liquidity saw extremely high demand earlier in the day. Banks asked to borrow 25.481 billion pounds ($50.45 billion) in aggregate, far outstripping the 4.4 billion pounds on offer from the central bank's emergency 2-day refinancing operation.
The Royal Bank of Scotland-led consortium got the go-ahead from the Dutch Finance Ministry for its ABN Amro bid, which the rival Barclays offer had already received. Shares of RBS were 2.3% higher, ABN shares gained 2.5% and Barclays shares were 4.7% higher.
In other corporate news, Spanish-owned O2 U.K. and mobile phone retailer Carphone Warehouse have clinched a long- awaited deal to bring Apple's coveted iPhone handsets to Britain. Shares in Telefonica, owner of O2, rose over 2%.