By Sara Sjolin, MarketWatch

LONDON (MarketWatch) -- European stocks climbed as investors showed greater tolerance for risk Thursday, after U.S. policy makers expressed optimism that they could reach a deal to avert the so-called fiscal cliff.

The Stoxx Europe 600 index rallied 1.2% to close at 276.31, the highest level since early June last year.

"Financial markets are trading at the mercy of the fiscal cliff at the moment and very choppy sessions should be expected ahead of Christmas," analysts at Danske Bank said in a note.

European markets were buoyed by Wednesday comments from U.S. politicians that calmed nerves about the fiscal cliff -- the hundreds of billions in tax hikes and across-the-board spending cuts that would take effect in 2013, jeopardizing prospects for the largest global economy.

President Barack Obama said late Wednesday he hoped to resolve the fiscal-cliff issues before Christmas, while House Speaker John Boehner told reporters he was hopeful that Republicans could reach a deal with the White House "sooner rather than later."

After European markets closed on Thursday, however, Boehner made new comments, saying there has been no "substantive progress" in the fiscal-cliff negotiations. The comments caused U.S. stocks to give up most of their gains.

"It has to be emphasized that there are in fact few indications that the two sides are moving closer to each other on important issues like taxes," the Danske Bank analysts wrote.

Earlier this week, financial markets sold off after Senate Majority Leader Harry Reid expressed disappointment with the state of negotiations.

Victoria Clarke, an economist at Investec Securities, said that worries politicians won't reach a deal in time "is starting to have an impact on investors already." "The Beige Book showed yesterday that the uncertainty is weighing on certain investments and we will see that escalate as we get closer to the end of the year without a deal," she said.

In U.S. economic news, pending homes sales climbed 5.2% in October, while the U.S. economy grew by 2.7% in the third quarter, up from a previous estimate of 2%.

On the data front Thursday in Europe, numbers for Germans without a job rose by 5,000 in November, well below an increase of 18,000 expected by analysts, according to FactSet. The jobless rate in the biggest European economy stood at 6.9%, as expected.

Movers

In London, shares of Invensys PLC jumped 8.9%. Late Wednesday, the software firm said it sold its rail-signaling unit to Germany's Siemens AG (SI) for 1.74 billion pounds ($2.78 billion). Barclays raised its rating on Invensys to overweight from equal-weight following the announcement.

Shares of Siemens gained 0.3% in Frankfurt.

Pointing in the other direction, shares of Electricite de France SA lost 1%, after a Paris court reportedly ruled that the electric-utility firm has overcharged households to the tune of 8.8 billion since 2009. A representative from EDF said the company is "unaware of the possibility of refunds."

Banks were among the best performers in Europe, with shares of Spain's Banco Popular Español SA rallying 5% and Banco Santander SA (SAN) rising 2.4%. The IBEX 35 index jumped 1.7% to 7,973.70 in Madrid.

In Germany, shares of Commerzbank AG gained 2.6%, while Deutsche Bank AG (DB) added 1.6%.

Shares of Volkswagen AG rose 1.3% to 165.80, after Morgan Stanley lifted its target price on the auto maker to 205 from 185 and reiterated its overweight recommendation.

The DAX 30 index rose 0.8% to 7,400.96.

Among French stocks, shares of GDF Suez SA advanced 2.8%, after Credit Suisse raised its rating on the utility firm to neutral from underperform.

The CAC 40 index rose 1.5% to 3,568.88.

And in the U.K., shares of Pennon Group PLC rallied 4.3%. The water- and waste-management firm reported a 3.4% increase in first-half pretax profit and lifted its dividend.

Mining shares also were on the rise in London, tracking gains for most commodity prices. BHP Billiton PLC (BHP) rose 1.9%.

Making a bigger move to the upside, shares of Rio Tinto PLC (RIO) jumped 5.1% as the company disclosed plans for more than $7 billion in spending cuts and savings.

Overall, London's FTSE 100 index closed 1.2% higher at 5,870.30.

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