Banks Lead Rally in Euro Stocks; Oil Falls 

European stocks gained on Tuesday to snap a three-day losing streak thanks to a drop in oil prices and better than feared results from Societe Generale that lifted banks ahead of a U.S. rate decision.

Oil-sensitive airline stocks were among the biggest gainers as crude fell to a three-month low around $118 a barrel, calming recent fears over inflation and corporate costs.

Ryanair rose 11 percent and British Airways added 5 percent, while Air France-KLM, which posted better than expected earnings, gained 9.4 percent.

"It's really the fact that the oil price has gone below $120 a barrel, simple as that," says Neil Glynn, analyst at NCB Stockbrokers in Dublin.

Danish brewer Carlsberg soared 16 percent after posting forecast-beating second-quarter earnings. The solid results lifted shares in peers Heineken 5.1 percent and InBev 5.8 percent. (Click here for CEO interview).

The FTSEurofirst 300 index of top European shares closed up 2.6 percent at 1,182.31 points. The index is down 22 percent on the year.

"It's quite good news from Societe Generale but overall this market rebound will be short-lived and I remain bearish on stocks," said Christian Jimenez, president of Imene Investment partners, in Paris.

"What you see on oil prices is a relatively excessive correction as the tropical storm won't hit Texas, but it doesn't mean fundamentals have improved. The retreat should not last very long," he said.

"The impact from the U.S. economic slowdown, as well as from downturns in Europe and in emerging markets, has not been completely priced in. I think the market will move sideways for a while, before revisiting recent lows," he added.

France's Societe Generale rose 9.4 percent after posting a 63 percent fall in second-quarter net profit, hit by losses at its corporate and investment banking unit, but the results beat most analysts' expectations.

In a note to clients, Landsbanki Kepler noted that the results highlighted a recovery in underlying revenue at the bank's corporate and investment banking division despite the current market conditions.

The DJ Stoxx banking index, which remains down 29 percent on the year, surged 5.7 percent on Tuesday, with Barclays up 8.8 percent, Natixis up 11 percent and HBOS up 12 percent.

Banks have been hit over the past year by the crisis in the credit market that has forced financial institutions to unveil massive asset writedowns related to bad debt.

Financials were also in the spotlight ahead of the interest rate decision by the U.S. Federal Reserve, due after the European market close.

The U.S. central bank is expected to leave its rates at 2 percent.

Howard Wheeldon, senior strategist at BGC Partners, is among those who expected the Fed to leave rates on hold.

"I expect them to say that the risks of moving rates at this stage are outweighed by the inflationary pressures which would be created and that, whilst the economic situation remains on the downside, there are some indications that concerns may have somewhat reduced," he said.

European energy stocks were the big losers of the day, falling along with oil prices.

Total lost 1.6 percent and BP fell 1.1 percent.

>> As a State Controled Bank, N. Rock Loses $1 Billion

>> Adidas Profit Rises 23% on Better Sales

>> Michael Page Soars After Bid Approach from Adecco

>> Standard Chartered Earnings Beat Forecasts

>> Video: First Half Smells Sweet for Givaudan