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European stocks close higher; sterling hits 31-year low on Brexit fears

European stocks closed higher Tuesday with Deutsche Bank back in focus for its first trading day of the week following a public holiday in Germany.

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The pan-European STOXX 600 ended the day up 1.04 percent, with the FTSE 100 up 1.96 percent, Germany's DAX up by 1.18 percent and France's CAC 40 enjoying a 1.29 percent hike.

Deutsche Bank's share price went on a roller-coaster ride last week on the news that it would have to pay $14 billion to settle with the U.S. Department of Justice. But a report on Friday by AFP suggested this could be reduced to $5.4 billion. Talks, however, are ongoing according to the Wall Street Journal and no settlement has been reached.

After opening higher, stocks in the U.S. were lower in mid-morning trade, with the Dow Jones industrial average off 0.13 percent and the broader S&P 500 down around 0.15 percent.

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Analysts still expect the bank will need to raise fresh capital to deal with any penalty, which is worrying investors.

HSBC cut its price target for Deutsche Bank but shares in the German lender were still slightly higher in opening trade.

ABB announces share buyback

Elsewhere, ABB said it was not selling or spinning off its Power Grids business on Tuesday and announced a $3 billion share buyback scheme from 2017-2019. Shares of ABB were flat.

French luxury group LVMH was trading higher after it said it is buying an 80 percent stake in German high-tech luggage maker Rimowa for 640 million euros ($716.16 million).

Meanwhile, Vivendi shares were higher after Deutsche Bank raised its target price for the stock.

Italian banks in focus

The Italian banks sector was also in focus for investors amid a large amount of news flow. Unicredit will choose the buyer of its Pioneer asset management business only after a referendum on Italian Prime Minister Matteo Renzi's constitutional reform on December 4, Reuters reported, citing three sources. Shares of Unicredit were sharply lower.

UBI Banca is in the process of trying to buy four small troubled Italian banks that were rescued from bankruptcy last year, with Italian politicians trying to push forward the deal. However, reports have surfaced suggesting the European Central Bank is making this difficult. Furthermore, Italian newspapers Il Messaggero and La Stampa reported that Intesa Sanpaolo and Unicredit are not willing to help facilitate UBI Banca's acquisition of these banks. Shares of UBI Banca were in negative territory.

Brexit, Fed hike back on the table

Traders are also focusing on Britain's path to Brexit after U.K. Prime Minister Theresa May announced over the weekend that Article 50 would be triggered by the end of the first quarter of 2017. Sterling weakened sharply hitting its lowest level since 1985.

The U.S. Federal Reserve and its rate hiking schedule is also back in focus for investors. Friday's scheduled release on September employment is the key data for the week. Ahead of that, no major data are scheduled for Tuesday release and traders will eye two U.S. Federal Reserve speakers for indications on the likelihood of a December interest rate hike.

Richmond Fed President Jeffrey Lacker is scheduled to speak on the economic outlook at 8:05 a.m., ET, while Chicago Fed President Charles Evans is set to speak at 7:40 p.m., ET, on monetary policy and the economy.

- CNBC's Evelyn Cheng contributed to this report.

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