European Stocks Close Higher, Led by U.S. Market

European stocks closed higher after a lackluster start, rallying in the afternoon after U.S. economic data eased fears of a recession.

The London FTSE-100 and the Paris CAC-40 were largely flat and the Frankfurt DAX was slightly higher. The FTSE CNBC Global 300 was also flat.

The Institute for Supply Management's index for August, which indicates the health of the manufacturing sector and gives clues on the broader economy, came in at 52.9, basically in line with the 53 expected by economists.

U.S. stocks traded higher after the data, lifting European spirits. Asian markets closed mixed, with Tokyo struggling with a hangover from Monday's unexpectedly weak capital spending data, but Australia moving on strong economic growth numbers.

Rebound in Banking

The banking sector continued its rebound, with Germany's Deutsche Bank saying that it has suffered some impact from recent credit market problems, but that it hasn't made unsecured loans to hedge funds and that its margin calls are being met.

The statement, made by the bank's CEO Josef Ackermann, was a welcome change of the banks' usual strategy of refraining from commenting publicly on their exposure, and helped reassure investors. Some observers of the Frankfurt stock market called the upward surge "the Ackermann rally."

In London, trading was lacklustre and the afternoon rise was mainly "a reaction to the U.S. figures," David Jones, from CMC Markets, told "European Closing Bell."

A sharp drop in investment and government spending more than halved quarterly euro zone growth for April to June, but the forecast was in line with analysts' expectations.

No Big Worries

"The euro zone economy is probably losing a bit of momentum…but there isn't really something to be worried about," Peter Dixon from Commerzbank told "European Closing Bell."

Corporate earnings boosted an otherwise quiet start to trading with Swiss Life, the lead gainer on the SMI, gaining 0.9%, as the insurer said it beat expectations with a 21% rise in first-half net profit.

And Swedish regulators launched a probe into OMX's action in regards to Borse Dubai's bid for the Swedish exchange. Shares of OMX gained 0.8%.

Analysts predict cautious trading on Wednesday and Thursday ahead of the European Central Bank's rate-setting meeting, with markets widely expecting the ECB to keep its main monetary policy rate on hold.