Riskier banking assets rose as European shares were squeezed higher on Tuesday on speculation that Germany's constitutional court would give its blessing to Europe's new bailout fund, which could pave the way for the fund to be used more flexibly.
In extremely choppy and light trade the FTSEurofirst was up 12.14 points, or 1.2 percent at 1,042.23, by 1043 GMT although volumes were just 27 percent of their 90-day average, reflecting the broader uncertainty preventing investors from pumping fresh cash into such a tumultuous market.
After a bullish start to the second half of 2012 when the FTSEurofirst gained more than 5 percent over three trading days fueled by expectations of central bank intervention to help boost flagging global growth, the rally has petered out around 1,050.
That level is technically significant as the 61.8 retracement of a fall which began in March - when euro sovereign debt worries resurfaced - and bottomed out at the beginning of June, as expectations of central bank intervention grew.
The index is range bound in the short-term seeing solid support around 1,030.
Grabbing investors' attention on Tuesday was a meeting of Germany's top court to address whether Europe's new bailout fund, the ESM, and budget rules are compatible with national law. The German parliament approved the ESM in June, but the court hearing is expected to take some time, keeping Europe on tenterhooks.
German Finance Minister Wolfgang Schaeuble told the court that a big delay to the ESM could cause uncertainty on markets and a loss of confidence in the EU's ability to make decisions.
"It would be incrementally positive if the German court approved it and if they didn't, then it would not be great for the markets," said an analyst at a large London-based brokerage.
Banks, which would be the major beneficiary if the fund were to be approved, rallied along with other risk assets as investors bought in on the beaten down lenders.
The sector trades on a price to book value of just 0.6 times, according to Thomson Reuters data, but the London-based analyst is cautious on the banking sector in the longer term citing clarity issues in the face of regulation uncertainty, lending constraints and balance sheet strength, which is weighing on their outlook.
A euro zone finance ministers' decision to grant Spain an extra year to reach its deficit reduction targets and set the parameters of an aid package for Madrid's ailing banks was broadly as expected, and also helped set a more bullish tone.
As uncertainty lingers over most sectors, the upcoming quarterly earnings season is expected to show the impact volatile trading conditions in Europe is having on corporates with European company profits forecasts to shrink by 9 percent compared with a 4.5 percent expansion in the United States, according to Thomson Reuters Starmine data.
Aluminium producer Alcoa started the earnings season in the U.S. by posting a second-quarter loss overnight, but results, excluding one-off items, beat Wall Street estimates.
Highlighting just how tough it is for companies in the current macro economic environment in Europe, French catering-to-vouchers group Sodexo shed 5.5 percent after it said growth slowed in the third quarter as corporate clients reduced spending across Europe, although it kept its full-year targets.
UK peer Compass Group slipped 2.5 percent.
Bellwether British retailer Marks & Spencer echoed Sodexo's sentiment as it posted its worst underlying quarterly sales performance for three and a half years.
Marks & Spencer shares, however, rose 2.2 percent, having been shorted in advance, according to data from Markit.
Elsewhere on the upside, ASML Holding jumped 8.8 percent after Intel Corp said it would spend more than $4 billion to buy up to 15 percent of ASML and bankroll the Dutch company's research into costly next-generation chipmaking technology, a major vote of confidence in the European firm.
UK chipmaker and Intel rival ARM Holdings ARM.L fell 1.8 percent.