The euro zone's STOXX 50 <.STOXX50E> had its best day since April 2017, up 1.7 percent, and gains spanning cyclical sectors including industrials <.SXNP> and banks <.SX7P> drove the pan-European STOXX 600 <.STOXX> 0.9 percent higher.
Services PMI data showed the euro area was near its best growth in seven years, while services growth in Italy and Spain beat the previous flash estimates.
Banks Santander (>> Banco Santander), BNP Paribas (>> BNP Paribas) and ING (>> ING Groep) were among the top boosts to the STOXX as increasing enthusiasm about the euro zone's recovery helped push money into financial stocks.
Erste Bank (>> Erste Group Bank AG), Credit Agricole (>> Crédit Agricole), UBI Banca (>> UBI Banca) and Natixis (>> Natixis) gained from 3.4 percent to 5.1 percent.
"The continued strength and breadth of the business surveys is encouraging," said Mike Bell, global market strategist at JP Morgan Asset Management, adding the improvement in Italian PMIs was a positive heading into the election.
"We continue to believe that the outlook for European equities is positive, aided by the potential for close to 10 percent earnings growth in 2018," Bell added.
The improving economic backdrop drove analysts to hold back on downward revisions for euro zone company earnings as they awaited the beginning of the fourth-quarter results season.
Better-than-expected U.S. car sales data and rising oil prices also drove auto and energy stocks higher.
Germany's DAX <.GDAXI> led the way with a 1.5 percent gain thanks to strong carmakers and industrials, while Britain's FTSE 100 <.FTSE> hit a record high during the session, but closed at a modest rise of 0.3 percent.
U.S. car sales data for December beat analysts' expectations, driving European automakers <.SXAP> up 1.8 percent, leading sector gainers.
Italian carmaker Fiat Chrysler (>> Fiat Chrysler Automobiles) rose 8.3 percent to hit a record high, among top STOXX gainers, while Daimler (>> Daimler), Volkswagen (>> Volkswagen) and BMW (>> Bayerische Motoren Werke) led the DAX.
"Defensive sectors, industrials, energy and IT could offer interesting opportunities," said Romain Boscher, co-head of equities at Amundi. On small- and mid-caps Boscher said he remained positive on cyclical themes.
Remy Cointreau (>> Rémy Cointreau) was a rare laggard, down 2.9 percent after Investec downgraded the stock, saying Chinese anti-corruption measures could affect consumption of costly status symbol products like cognac.
(Additional reporting by Julien Ponthus, editing by Kit Rees, Janet Lawrence and Pritha Sarkar)
By Helen Reid
Stocks treated in this article : BNP Paribas
, Rémy Cointreau
, Crédit Agricole
, Banco Santander
, UBI Banca
, Bayerische Motoren Werke
, Erste Group Bank AG
, Debenhams Plc
, Fiat Chrysler Automobiles
, ING Groep