Germany's DAX 30 Index rose 1.1 per cent, leading gains across the region, after France and Germany agreed to work together on proposals for fiscal, banking and monetary union.
Agreement on a broader joint effort to strengthen the euro zone was announced by German Finance Minister Wolfgang Schaeuble after he met his French counterpart Pierre Moscovici, and gave some comfort to investors that Europe will make progress.
The plan gave some comfort to investors because France and Germany have been at odds on how to move forward. German Chancellor Angela Merkel has insisted euro nations tighten their belts before getting financial aid and the Bundesbank opposes the European Central bank's proposal to resume buying their bonds, announced this month by ECB chief Mario Draghi.
Bundesbank chief Jens Weidmann was quoted in Der Spiegel at the weekend calling the bond-buying plan a "drug" that governments would get hooked on.
The German and French finance ministers met following talks in Berlin between Merkel and French President Francois Hollande last week.
The Ifo institute in Munich said its business climate index, based on a survey of 7,000 executives, dropped to 102.3 from a revised 103.2 in July. The lowest prediction in a Bloomberg News survey of 37 economists was for a decline to 101.
Business confidence in Germany fell for a fourth straight month in August, according to the Ifo institute's business climate index, which fell to 102.3 from 103.2 in July. While that missed economist estimates, it doesn't signal total gloom in Europe's largest economy. The Ifo gauge of current conditions fell to 111.2 from 111.5.
Gains on the DAX were led by a 2.4 per cent advance for Deutsche Bank and continue the advancing trend since the stock index bottomed in early June. The regional Stoxx Europe 600 Index climbed 0.5 per cent, with a 7.7 per cent gain by Nokia amid bets Apple's copyright victory over Samsung may provide a boost for other handset makers.
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Apple was up 2 per cent in afternoon trading on the Standard & Poor's 500 Index following the decision of a federal court jury to order Samsung to pay the US company more than US$1 billion for infringing patents. Apple now wants a ban on the cellular version of Samsung's Galaxy Tab 10.1 tablet computer, which wasn't covered in the verdict.
The S&P 500 was about 0.2 per cent higher at around 3:15pm in New York, helped by Apple and continued speculation about central bank stimulus plans.
The ECB's Draghi is on the line-up to talk at the central bankers' retreat at Jackson Hole, Wyoming this weekend, a summit that has been increasingly hyped because of speculation Federal Reserve chairman Ben Bernanke will use the occasion to expand on the fed's plans for further monetary stimulus in the world's biggest economy.
Markets may be disappointed, according to Bloomberg News, which cited economists saying Bernanke probably won't go as far as to announce a third round of bond buying, or QE3.
"You can't find a trader who doesn't think Ben Bernanke is going to signal QE3 at Jackson Hole," Dan Greenhaus, chief global strategist at BTIG LLC in New York told Bloomberg. "But to have traders so convinced that this is a sure thing kind of screams there's room for a letdown here."
American investors are also keeping one eye on Tropical Storm Isaac as it heads for the Gulf Coast as it is expected to strengthen to a hurricane. While the storm has shuttered some oil and gas production facilities crude oil has actually weakened on bets the impact won't be that severe.
Brent crude was recently at US$114.49 a barrel, down from more than US$118 a barrel on August 23.
