By Sara Sjolin, MarketWatch

LONDON (MarketWatch) -- Oil firms led European stocks higher on Tuesday, as oil prices topped $97 a barrel for the first time since mid-September, while encouraging German consumer-confidence data and solid U.S. earnings reports also lifted sentiment.

The Stoxx Europe 600 index added 0.3% to close at 290.30 after snapping a three-day winning streak on Monday.

"The markets have had a good run for a couple of months, but I think the euro area still has more problems. Markets need to remember that a lot of the euro-area countries are in recession and that will have an impact on company earnings," said John Redwood, chief of the investment committee at Evercore Pan-Asset.

"Some countries have done a good job of meeting requirements, but there are still large deficits and it's difficult to get the economies growing again. It makes sense to pause after this rally," he said.

Shares of Royal Philips Electronics NV (PHG) posted one of the biggest gains in the pan-European index, up, 2.3%, after the Dutch firm said it expects sales to pick up in the second half of the year.

William Hill PLC picked up 2.1%, after the online-betting site said operating profit for the 14 weeks to Jan. 1 grew by 20%.

Pointing in the other direction, shares of Sandvik AB lost 0.7%. The Swedish engineering group reported fourth-quarter profit, which was slightly lower than a year ago, and said production rates declined in a reflection of weaker demand.

Shares of Sanofi SA (SNY) lost 0.8% as Barclays cut the French drug maker to equal weight from overweight. The bank also downgraded Germany's Bayer AG to underweight from equal weight, sending its shares 2.8% lower.

GlaxoSmithKline PLC (GSK), up 1.6%, was lifted to overweight from equal weight.

Fed meeting under way

Elsewhere, European stock markets were broadly upbeat, erasing earlier losses as investors took inspiration from Wall Street, where better-than-expected earnings reports from Pfizer Inc. (PFE) and Valero Energy Corp. (VLO) gave way for optimism.

U.S. stocks traded in positive territory Tuesday, ahead of a two-day Federal Reserve meeting.

The central bank is expected to keep monetary policy ultra loose in efforts to boost the labor market and economy. A statement is expected at the conclusion of the meeting on Wednesday.

On the data front in the U.S., the S&P/Case-Shiller 20-city composite showed home prices declined in November on seasonal weakness.

Separately, a gauge of consumer confidence fell to the lowest level in more than a year in January.

Closer to home, data from Germany showed consumers became more confident at the start of 2013. The GfK consumer-climate study improved to a 5.8-points forecast for February, up from 5.7 points in January and better than expected by analysts.

The German DAX 30 index rose 0.2% to 7,848.57, with shares of ThyssenKrupp AG up 2.7%.

Outside the main index in Frankfurt, shares of Software AG sank 17%, after the IT firm said 2012 revenue and earnings before interest and taxes declined compared with a year earlier.

In France, the CAC 40 index inched 0.1% higher to 3,785.82, even as shares of Credit Agricole SA slumped 2.7%, Société Générale SA dropped 1.4% and BNP Paribas SA lost 0.9%.

Shares of oil group Total SA (TOT) gained 1.6%, as oil prices climbed above $97 a barrel.

Oil firms were also on the rise in the U.K., with shares of BP PLC (BP) and Royal Dutch Shell PLC both up 1.5%.

Shares of Royal Bank of Scotland Group PLC (RBS) slumped 6% after The Wall Street Journal reported that U.S. authorities want the bank to face criminal charges over allegations of rigging interest rates.

An RBS spokesman said, "discussions with various authorities in relation to Libor setting are ongoing. We continue to cooperate fully with their investigations."

The FTSE 100 index closed 0.7% higher at 6,339.19.

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