Europe's main stock markets closed higher on Tuesday, recovering some of the ground lost in the previous day's heavy sell-off as investors welcomed a strong German investor confidence report.

At the same time, dealers said trade remained cautious and a mixed bag of US figures late in the day did not help players who have turned more defensive following Friday's disappointing US consumer confidence report.

After a steady performance overnight in Asia, European markets were buoyed at the opening by the ZEW survey in Germany which jumped 16.6 points to 56.1 points in August, easily beating analyst forecasts of around 47.3 points.

The news was welcome after Monday's heavy losses and was taken to confirm surprise figures last week showing Europe's biggest economy emerging from recession sooner than expected.

In London, the FTSE 100 index of leading shares gained 0.88 percent to 4685.78 points. In Paris, the CAC 40 rose 0.91 percent to 3450.69 points and in Frankfurt, the DAX put on 0.94 percent to 5250.74 points.

On Wall Street, the blue chip Dow Jones Industrial Average was up 0.78 percent at around 1600 GMT, supported by better-than-expected company earnings although mixed data on housing and inflation kept the gains in check.

On Monday, the Dow lost 2.0 percent, the worst fall since July 2.

"A better-than-expected economic sentiment report out of Germany and better-than-expected earnings news from Dow component Home Depot have been counted as uplifting factors," said Patrick O'Hare of Briefing.com.

Home Depot, the world's top do-it-yourself retailer, topped profit expectations and also raised its full-year forecasts.

Figures showing US home construction declined unexpectedly in July and wholesale prices were down by a sharper-than-expected 0.9 percent in the month kept investors watchful in both Europe and New York.

"Unexpected declines in housing starts and building permits and a cooler-than-expected reading of prices at the producer level are tempering sentiment," analysts at Charles Schwab & Co said in a note.

In London, Joshua Reynolds of City Index said there was some bargain-hunting after Monday's fall but the gains were then limited by the US data.

Tim Hughes, head of sales trading at IG Index, also noted the mixed US economic figures, saying that they and other data should serve "to remind investors that there is still an alternative to an unmitigated upward trajectory for global economies.

"There has been evidence over recent months that we are past the worst, but it could be a long climb back to normality," Hughes said.

Elsewhere in Europe, Amsterdam rose 0.87 percent, Brussels gained 1.38 percent, Milan put on 1.36 percent, Madrid added 1.04 percent and Swiss stocks were up 1.19 percent.

Earlier in Asia, Tokyo edged up 0.16 percent, Hong Kong was 0.84 percent higher but Sydney slipped 0.15 percent.