European Stocks Finish on High Note

The pan-European Dow Jones Stoxx 600 improved 1.1 percent to 366.04, led by Aegon, German pharmaceutical and chemicals giant Bayer and Anglo Irish Bank.

Bayer benefited from an upgrade to buy from neutral at UBS, Aegon climbed after reporting a 19 percent profit rise and hiking its dividend, and Anglo Irish Bank gained after saying first-half earnings per share should rise 40 percent.

"Our view all along is that the fundamentals are very strong," said Ian Richards, a strategist at ABN Amro in London. "Valuations are sub-13 times earnings, profit forecasts are going up and not down, and you still have a great deal of latent value on corporate balance sheets."

The German DAX Xetra 30 closed up 1.4 percent at 6,713.23, the French CAC 40 rose 1.3 percent to 5,524.26 and the U.K. FTSE 100 improved 1.2 percent to 6,227.70.

The gains came after the European Central Bank as expected hiked its key rate to 3.75 percent, and the Bank of England held rates unchanged at 5.25 percent.

"There's no doubt rates are going up, but that's a signal of a sign of strong underlying economies in both the euro region and in the U.K.," Richards said. "If this kind of economic data persists, that should underpin corporate earnings forecasts."

Metals firms including Boliden and Xstrata sported the best sector performance as copper and gold futures advanced.

French utilities Suez and Veolia Environnement both climbed after reporting a jump in 2006 profit.

Shares of Suez, which is trying to merge with Gaz de France, rose 2.3 percent. The firm said its profit rose an above-forecast 43.5 percent to a record high, on cost reduction measures and new contracts. Suez also said it plans to buy out the remaining 1.4 percent of Belgium's Electrabel.

Veolia shares added 2.1 percent as a 23.5 percent.

Shares of PPR, the owner of French department stores and the luxury goods group Gucci, gained 1.3 percent after it said its annual profit rose a stronger-than-forecast 28 percent, on a "remarkable" performance in luxury goods and a "satisfactory" retail performance.

Pernod Ricard shares slipped 4.6 percent after the maker of Martell brandy reported a below-forecast 2.4 percent first-half profit rise.

Shares in BNP Paribas and Deutsche Bank both added 2.4 percent after they were upgraded by J.P. Morgan, which lifted its rating on the European investment banking sector as a whole to neutral from underweight.