NEW YORK (CNN/Money) - European stocks finished higher on Tuesday, driven by economy-sensitive car makers as stellar U.S. data fanned economic recovery hopes, but fears that U.S. monetary policy might tighten soon capped sentiment.
Heavily weighted oil stocks Royal Dutch, BP, Total and ENI supported markets, gaining about two percent each as oil prices hovered near recent peaks.
Other outstanding stocks included UCB, which closed 7.4 percent higher after fund managers cited data from industry pollsters IMS Health showing that U.S. prescriptions for the Belgian drugmaker's epilepsy treatment Keppra surged 41 percent in the year to late March.
But Philips Electronics slipped 3.2 percent as investors looked past news that Europe's biggest consumer electronics maker had swung to a first-quarter net profit and given an upbeat outlook and focussed instead on its slow sales growth and modest operating profits.
The FTSE Eurotop 300 index of pan-European blue chips closed 0.8 percent higher at around 1,023 points, a mere five points away from a 20-month peak of 1,028.03 points in early March but off from earlier session highs.
Fed rate hike specter
The benchmark Eurotop 300 index had appeared close to setting a 21-month high earlier in the afternoon as investors bet on a solid U.S. data report, but the index trimmed gains after the publication of an unexpectedly strong 1.8 percent rise in March U.S. retail sales that dwarfed expectations.
The rise -- the biggest gain since March 2003 -- and the upward revision of February sales sent Treasury yields to three-month highs as the market priced in a greater risk of an early Federal Reserve rate hike.
"Stock markets probably interpret the number as a bad omen for cheap borrowing, even though the Fed will not raise interest rates until it gets several servings of strong employment numbers," said economist Chloe Magnier at broker CIC Securities.
The narrower DJ Euro Stoxx 50 index rose 1.1 percent to nearly 2,890 points as Frankfurt's DAX and Paris's CAC 40 closed higher by 1.4 percent and 0.9 percent respectively. In London the FTSE 100 added 0.6 percent, and Zurich's SMI gained 0.9 percent.
Strategists said more equity gains may be in the offing if quarterly earnings from technology bellwethers Intel later on Tuesday and Apple Computer on Wednesday, as well as next week's start to the European reporting season, were to match the market's bullish expectations.
"The recovery is under way. It's taken quite a strong grip and it will keep coming through. We'd expect that to feed into strong profit growth this year as well," said Stewart Higgins, European investment director at fund managers Martin Currie in Edinburgh.
Auto gains
Autos were among the biggest blue chip gainers, buoyed as U.S. retail data showed that March sales of cars in the key U.S. market had risen 7.2 percent year-on-year.
Renault and Peugeot gained more than one percent each, while German luxury car maker BMW added two percent. The stocks were also helped by the weakening of the euro against the dollar.
Volkswagen motored 2 percent ahead after the car maker said March sales in its key Chinese market jumped 30 percent year-on-year.
The weakening of the euro helped other large European exporters such as German drugs and chemicals maker Bayer, which finished the session 2.8 percent higher.
Among other gainers were insurance companies, which benefit from higher bond yields and whose equity portfolio inflates when the market rallies. Aegon and Allianz rose roughly 2 percent each.
-- Reuters contributed to the story
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