Euro zone shares rose as much as 1.2% after the central bank said it would not hike rates until it sees inflation reach its 2% target "well ahead of the end of its projection horizon and durably". The index closed up 0.8%.
But the rate-sensitive euro zone banking index fell 0.2%, with government bond yields on the decline. [GVD/EUR]
The region-wide STOXX 600 rose 0.6%, recovering fully from its worst selloff in 2021 earlier this week, leaving it just 1% away from record highs.
"This news should be a short-term positive for European stocks and the overall recovery trade, providing additional support especially amidst rising nerves over the Delta (coronavirus) variant," said Xian Chan, chief investment officer, wealth management at HSBC.
ECB President Christine Lagarde warned a fresh wave of the pandemic could pose a risk to the euro zone's economic recovery.
Travel and leisure stocks topped sectoral gains again, rising 2.6%. The index had hit a five-month low on Monday on fears over the growing spread of Delta variant.
In earnings-driven moves, private equity firm EQT jumped 12.8% to the top of STOXX 600 after reporting upbeat first-half earnings, while Swiss engineering company ABB hit its highest since November 2007 after it doubled its full-year sales outlook.
But Unilever warning that surging commodity costs would squeeze its full-year operating margin sent its shares to 3-1/2 month lows.
Along with a slide in mining majors BHP and Rio Tinto, which tracked a 7.3% plunge in iron ore prices, London's blue-chip index dropped 0.4%.[IRONORE/]
Of the quarter of the STOXX 600 companies that have reported so far, 61% have topped analysts' profit expectations, according to Refinitiv IBES data. Typically, 51% exceed earnings forecasts.
The benchmark STOXX 600 hit all-time highs last week on optimism about a strong recovery in economic growth and earnings. However, markets have turned volatile recently on concerns about higher inflation and a resurgence in virus cases.
Sweden's Nordic Entertainment surged 10.3% after reporting a rise in subscribers and quarterly operating income, while Italy's Monte dei Paschi jumped 3.7% after the lender and its former top investor reached a preliminary accord to settle their legal disputes.
Swiss drugmaker Roche slid 3.6% after flagging an anticipated slowdown in demand for COVID-19 tests. (Graphic: Euro area PE ratio and inflation expectations,
(Reporting by Sruthi Shankar and Susan Mathew in Bengaluru and Marc Jones in London; Editing by Frances Kerry and Mark Potter)
By Sruthi Shankar