By Tommy Stubbington and Clare Connaghan 

European stocks extended their rally Wednesday, prompted by expectations that authorities in Europe and China may push the button on further stimulus measures.

The Stoxx Europe 600 index was almost 0.8% higher in early trade, after rising 1.3% on Tuesday.

Shares have bounced back from losses earlier in the week, which followed the latest signs of a sharp slowdown in China, amid a growing sense that Beijing will launch new policies to boost the economy. Investors are also expecting further support from the European Central Bank.

A number of ECB officials on Tuesday sent strong signals that they are considering dramatic steps to stave off dangerously low inflation.

"Yesterday's comments are a fresh reminder that the ECB could do a lot more, if it saw real deflation risks, and certainly wants to convey a message that it hasn't run out of ammo," said Jan von Gerich, a global fixed income strategist at Nordea.

Germany's DAX led the gains, climbing 1.3%, helped by data showing German consumer confidence held at a seven-year high in March. London's FTSE 100 added 0.5%.

The gains look set to continue when Wall Street opens, with futures indicating a positive open Wednesday. Around 3 1/2 hours before the start of U.S. trading, futures contracts indicated a 0.4% opening rise for the Dow Jones Industrial Average and the S&P 500. Changes in futures don't always accurately predict market moves after the opening bell.

In currency markets, the Russian ruble continued to bounce back from recent heavy losses, hitting a five-week high against the dollar of 35.330 rubles per dollar.

The Russian currency has rebounded as investors turn their immediate focus away from the crisis in Ukraine and as Russian companies make tax payments.

"This week's tax payments may be spurring demand by Russian companies to convert their foreign currencies to rubles to make the payment," said Win Thin, global head of emerging market currency strategy at Brown Brothers Harriman.

Elsewhere, the euro continued to weaken against major peers.

In commodities markets, gold rose 0.3% to $1,315.0 a troy ounce, while Brent crude oil was 0.1% higher at $107.09 a barrel.

In corporate news, shares in Lloyds Banking Group fell sharply after the U.K. government sold a 7.8% stake in the bank, raising GBP4.2 billion.

Hedge fund firm Man Group was also among the fallers after Citigroup cut its trading recommendation to sell from neutral.

Standard Life was one of the top risers after agreeing to buy Ignis Asset Management for GBP390 million. Brokerage Panmure Gordon said the deal should allow Standard Life to benefit from greater scale as an asset manager and from cost savings.

Write to Tommy Stubbington at tommy.stubbington@wsj.com and Clare Connaghan at clare.connaghan@wsj.com