German business confidence rose unexpectedly in December, while German consumers were resilient in the face of rising economic risks and the ongoing debt crisis.

Spain's weekly auction of short-term debt was also encouraging for investors. Borrowing costs for 3- and 6-month notes fell sharply amid strong demand, indicating market confidence in the country's ability to handle its debt is recovering.

In the US, the Commerce Department said builders broke ground on 685,000 new homes last month, a 9.3 percent jump from October. That's the highest level since April 2010.

On Tuesday, investors focused on the upbeat economic indicators. Germany's DAX closed 3.1 percent higher at 5,847.03 while France's CAC-40 index gained 2.4 percent to 3,055.39. The FTSE 100 index of leading British companies rose 1 percent to 5,419.60.

Wall Street also rose strongly — the Dow gained 2.3 percent to 12,037.32 while the S&P 500 jumped 2.4 percent to 1,234.82.

In Asia, South Korea's Kospi led regional gains, rising 0.9 percent to close at 1,793.06 a day after tumbling 3.4 percent on news of Kim's death.

In currencies, the euro strengthened to $1.3071 from $1.3017 late Monday in New York. The dollar fell to 77.7 yen from 78.05.

Oil prices rose more than 2 percent on Tuesday . Brent February crude rose $2.78 to $106.42 a barrel by 11:37 a.m. EST (1637 GMT), having reached $107.27.

The US January crude contract, set to expire at the end of Tuesday's session, rose $3 to $96.88 a barrel, having reached $97.45.

US crude pushed back above the 200-day moving average of $95.78, with the 20-day moving average higher at $98.10 seen as a key resistance level.

"An improved tone to the euro is being facilitated by a sharp drop in short-term Spanish yields," Jim Ritterbusch, president at Ritterbusch & Associates, said in a note.

"(T)he possibility of a European embargo on Iranian crude appears to be propping up Brent prices in relation to WTI (US benchmark West Texas Intermediate crude)," Ritterbusch added.