Euro zone stocks <.STOXXE> gained 0.3 percent to hit a fresh 10-year high, and the pan-European STOXX 600 <.STOXX> index recovered from early losses to trade up 0.3 percent.

Spain's IBEX <.IBEX>, which had been held back by instability in Catalonia, hit its highest since August, up 1 percent after a ratings upgrade from Fitch that also sent the country's borrowing costs down to six-week lows.

Spain's Santander bank (>> Banco Santander) was the biggest single boost to the STOXX 600, leading a rally among financials.

While strong banking and oil stocks underpinned the market, merger and acquisition news across telecoms, pharmaceuticals and luxury sectors drove the lion's share of big stock moves.

Orange (>> Orange) and Deutsche Telekom (>> Deutsche Telekom) rose 2.1 percent each after a report in French daily Le Monde said the two companies had held merger talks last year.

"This could boost M&A expectations in Europe," said AFS Group analyst Jauke de Jong in Amsterdam. The telecoms sector has lagged the market for months, but hopes of dealmaking drew investors in, sending the index <.SXKP> up 1.4 percent.

French drugmaker Sanofi (>> Sanofi) fell 2.9 percent after the company announced an $11.6 billion takeover of U.S. haemophilia treatment specialist Bioverativ (>> Bioverativ Inc), with some traders saying the deal looked expensive.

Kepler Cheuvreux analysts said the deal raised a "host of questions" and wondered whether Bioverativ’s pipeline could offset pressure from a rival Roche treatment.

Swedish firm Sobi (>> Swedish Orphan Biovitrum), a partner to Bioverativ, soared 16.5 percent.

Cartier owner Richemont's (>> Compagnie Financière Richemont) offer for full control of online luxury retailer Yoox Net-a-Porter (>> Yoox Net-A-Porter Group) sent the Italian stock surging 24 percent to a record high.

"Given the lack of interesting acquisition targets up for sale in their core business of hard luxury, Richemont has decided to put at work its big cash pile investing into distribution channels," wrote Bernstein analysts.

Richemont shares closed down 1.6 percent as investors digested the up-to-2.8 billion euro (2.47 billion pounds) offer, a nearly 26 percent premium over YNAP's closing price on Friday.

UBS (>> UBS Group), Switzerland's biggest bank, recovered after an early fall when it reported a quarterly loss, driven by a large writedown on the U.S. tax reforms. UBS still boosted its dividends and announced a new share buyback programme, and the stock was up 0.4 percent at the close.

Retailers <.SXRP> performed well thanks to a 27.5 percent jump from UK online grocer Ocado (>> Ocado Group PLC) after it signed an agreement with Sobeys to develop the online grocery business at Canada's second-largest food retailer.

Germany-listed shares in South African retailer Steinhoff  (>> Steinhoff Africa Retail Ltd) rose more than 11 percent after the firm sold its 13.5 percent stake in investment firm PSG Group for 7.1 billion rand as it scrambled to plug a liquidity hole.

(Reporting by Julien Ponthus; Editing by Tom Pfeiffer and Kevin Liffey)

By Julien Ponthus and Helen Reid