Britain's FTSE 100 was up 3.1 percent at 5,091.21, Germany's DAX rose 2.7 percent to 5,820.59 and France's CAC-40 was up 3.3 percent at 3.441.10.

Asian stocks closed higher and Wall Street also gained on the open - the Dow Industrials Average was up 1.1 percent at 10,156.51 while the Standard and Poor's 500 was 1.4 percent higher at 1,088.69.

The increases make up for most of the losses on Tuesday, when investors feared the repercussions of painful austerity measures on Europe's economic growth and the knock-on impact on trading partners like the US and Japan.

The forced merger of a troubled savings bank in Spain has raised the fear of wider troubles in the banking sector and a freeze in credit markets like the one that accompanied the financial crisis in 2007 and 2008.

Mitul Kotecha, analyst at Credit Agricole CIB, said that the overnight recovery in market sentiment was encouraging, "indicating that the move in markets over recent weeks has not turned into a rout." He said some investors were looking for cheap stocks because while some sectors - such as Europe's banks - were likely to be hurt by the effects of the debt crisis, others would hold up well.

The economic data for the second quarter has largely been stronger than expected, Kotecha noted.

In fact, US official data showed orders for big-ticket manufactured goods rose 2.9 percent last month, more than double the 1.3 percent gain forecast by economists. The news is encouraging because US consumer spending accounts for a fifth of the global economy.

Earlier, the Organization for Economic Cooperation and Development raised its forecasts for growth in the world's 31 most developed countries. While it said global trade and growth in Asia would help the recovery, it also noted that the global economy was yet to stabilize and that risks lingered - as highlighted by Europe's debt crisis.

German consumer confidence, in fact, continue to slide, according to a survey by the GfK institute. After a rise in April, sentiment is expected to fall for a second month in June as consumers in Europe's largest economy fret about the highly unpopular bailout for Greece and the volatile euro exchange rate.

European governments, meanwhile, pushed ahead in their effort to tackle their debt loads. Italy passed 24 billion euros ($30 billion) in budget cuts for the 2011-2012 period while Greece is considering selling an array of state assets to raise much-needed cash.

In Asia, Japan's benchmark Nikkei 225 stock average closed 0.7 percent higher at 9,522.66 after tumbling 3.1 percent to a six-month low Tuesday.

South Korea's Kospi index gained 1.4 percent to 1,582.12 while Australia's S and P/ASX 200 index was up 1 percent. Hong Kong's Hang Seng index rose 1.1 percent while benchmarks in mainland China, Singapore, India, Indonesia and Taiwan also gained.

Apart from worries over Europe's fiscal crisis, Asian markets have been hit by escalating tensions on the Korean peninsula after North Korean leader Kim Jong Il reportedly ordered his military to prepare for combat.

The dollar edged up to 90.52 yen in Tokyo from 90.32 yen in New York late Tuesday. The euro declined to $1.2267 from $1.2372.

World oil prices rallied on Wednesday. New York's main contract, light sweet crude for delivery in July, jumped $2.44 to $71.19 a barrel. London's Brent North Sea crude for July soared $2.14 dollars to $71.69.

Oil had plunged Tuesday on fears that the euro zone financial crisis could turn toxic for the global economic recovery.

"Oil is taking its cue from equities," said Victor Shum, senior principal of Purvin and Gertz energy consultants in Singapore.

Meanwhile, the US government's Department of Energy (DoE) announced Wednesday that American crude inventories rose by 2.4 million barrels in the week ending May 21.

Market expectations had been for a much smaller gain of 200,000 barrels, according to analysts polled by Dow Jones Newswires.