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Europe stocks close 2.5% higher after two days of losses; FTSE up 2.5%

European stocks closed sharply higher Tuesday, following continued volatility on global markets as a result of the U.K. vote to leave the European Union.

European summit begins

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The pan-European STOXX 600 closed 3.3 percent higher provisionally with all bourses and sectors posting solid gains. London's FTSE 100 index was finished up 2.45 percent while the FTSE 250 – which is mainly made of domestic-focused stocks – rallied 3.6 percent.

Markets appeared to be cautiously optimistic despite sharp losses on Monday as investors digested the full implications of the U.K.'s vote to leave the EU. Britain's decision to leave the EU has prompted widespread fear that global growth could come under significant pressure, while the actual timeframe of the U.K. departure from the EU remains unclear.

Standard & Poor's announced Monday that it had lowered the United Kingdom's sovereign credit rating from "AAA" to "AA," citing last week's referendum. Meanwhile, Fitch lowered its rating from AA+ to AA with a negative outlook.

A European summit is being held in Brussels on Tuesday which Cameron is attending. Pressure is expected to be applied to the U.K. to trigger Article 50 which sets in motion the process of withdrawing from the EU.

In the U.S. on Tuesday, stocks traded more than 1 percent higher in morning trade. New data showed that consumers were feeling more optimistic than expected in June.

Banks rebound

Banking stocks, which have been beaten up in the last two trading days, bounced back with the sector outperforming the broader STOXX 600, despite continued concerns over the impact of Brexit.

Italian lenders were sharply higher after a number of reports suggested that the Italian government is preparing to take action to protect the country's banks which are burdened by billions of euros worth of bad loans. Shares of Unicredit – which is on the hunt for a new chief executive – were in the black during morning trade despite RBC cutting its price target for the stock. Shares, however, closed 1.5 percent lower.

Banca Monte dei Paschi di Siena was cut to "underweight" by Barclays, but still finished the session higher.

Shares of UBS finished higher despite a price target cut from both HSBC and RBS. Chief executive Sergio Ermotti said its too early to speculate how Brexit will look but added that negotiations are detrimental to Europe in an already difficult environment.

UK stocks rally

London-listed stocks with a focus on the domestic economy rallied on Tuesday. Travel firm Thomas Cook Group closed over 4 percent higher.

Grocery delivery firm Ocado reported a rise in first half pretax profit year-on-year and said that it doesn't believe Brexit will have any impact on the business. Shares of the firm closed 8.6 percent higher.

Homebuilders Bovis Homes, Persimmon and Taylor Wimpey were also sharply higher after two days in which they suffered a sell-off. Investors have been concerned that the Brexit vote could halt house buying as well as investment in U.K. property.

Shares of Legal & General rallied after it reported strong solvency figures and said it expects net cash for the first half of 2016 to be up 15 percent.

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