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Banks Lead Way as Europe Stocks Extend Gains

European shares closed higher on Tuesday after Portugal revealed an austerity-focused budget and a report suggested Spain is ready to request a bailout.

The FTSEurofirst 300 Index closed provisionally up 1.4 percent at 1, 113.93 points, while the euro zone Euro STOXX 50 index rose 2.5 percent to 2, 547.25 points.

On Monday evening, the Financial Times reported that Spain is preparing to make a rescue request — and it is now only waiting for external factors such as how the request would affect other euro zone countries, such as Italy , to be resolved.

A Bloomberg report Germany may be open to Spain seeking a precautionary line of credit from the region's bailout fund also helped support stocks, buoy the euro and trim Spanish debt yields.

The Spanish IBEX 35 Index recorded the largest gains among major European indexes on Tuesday, closing provisionally up 3.3 percent. S&P downgraded the credit ratings of several Spanish banks such as BBVA and Santander but shares were still firmly in the black.

Protests erupted in Portugal after the government revealed a tough 2013 budget on Monday. Demonstrators called for the prime minister to resign after sweeping tax hikes and spending cuts were announced. The country's economy is in recession for its third consecutive year.

On Tuesday, the euro zone and U.K. were released inflation data for September. In the euro zone it remained unchanged from the month before. In the U.K. consumer price inflation fell to 2.2 percent, its lowest in three years.

Investor sentiment data for Germany was also released on Tuesday, showing a better than expected increase.

In corporate news, the banking sector led gains across Europe, rising 2.9 percent after better-than-expected profits at Wall Street firm Goldman Sachs lifted financial stocks.

"We are a bit more positive for the time being, and we are more equity-orientated in terms of the portfolio, " said KBL Switzerland Chief Investment Officer Philippe Carette.

"We were quite defensive, but we have been adding more financial stocks to the portfolio, " he added.

Lloyds led the rally on the FTSE 100 index, while stocks in Credit Agricole, Societe Generale and Commerzbank also closed sharply in the black.

On the earnings front, Roche shares closed higher after the Swiss pharmaceutical firm released third quarter results that were in line with expectations.

Shares in UK-based miner Rio Tinto also closed higher after releasing third-quarter results . CEO Tom Albanese said the business remained resilient despite a volatile market.

Plane and car parts manufacturer GKN reported third quarter earnings which showed that a sluggish European automotive market weighed on the firm's profit. Shares in the firm closed down over 3 percent.

The auto sector was the only major index to close lower on Tuesday, after a report by Brussels-based industry association ACEA showed Europe's new car market shrunk by its fastest pace in 12 months in September.