Deutsche Telekom jumped nearly 4%, driving the rally in Frankfurt's DAX, after the telecom giant's T-Mobile and wireless carrier Sprint got U.S. approval for a merger initially valued at $26 billion.

Shares in Nordic network equipment makers Nokia and Ericsson also rallied on news of the U.S. approval, helping Europe's technology index <.SX8P> end at its highest in more than 18 years.

The DAX closed up 1% at 13,627.84 with gains across the board. The pan-European STOXX 600 index, which had its highest opening on Tuesday, powered 0.9% higher during the day to set a new closing best.

Globally, sentiment was lifted by the slowing number of new coronavirus cases in China. A top Chinese health adviser's suggestion that the epidemic may plateau in the next few weeks and be over by April further fuelled risk appetite, even as the death toll climbed above 1,000.

Markets have seen several volatile weeks following the news of the virus outbreak as investors worried about the extent of economic disruption.

But the rally feels a little premature, said Craig Erlam, a senior market analyst at Oanda.

"It's more reflective of investors' desire to not miss out on the latest rally, which leaves markets vulnerable to any negative news. Given how rapidly this virus has spread I would say there is more risk for bad news," he said.

Travel company TUI led gains on the STOXX 600, rising 13%, after it raised the lower end of its annual earnings outlook, citing strong holiday demand.

Overall, the travel and leisure sector rose 1.9%. Worries over travel disruptions caused by the virus had led to a heavy sell-off in the sector over the past few weeks.

Other China-exposed firms such as chipmaker ASML and Hong Kong-focused bank HSBC were among the companies giving the STOXX 600 index the biggest boost.

Basic resources stocks rose 1.7% on an uptick in iron ore and base metal prices while energy stocks tracked a rebound in oil prices from 13-month lows. [O/R] [IRONORE/] [MET/L]

But capping gains were shares of NMC Health, which fell 16% after buyout firm KKR said it did not intend to make an offer for the troubled healthcare company. NMC had shot up 24% on Monday after it revealed KKR's approach.

By Susan Mathew