Greece's economic prospects took a positive turn today, after Prime Minister Alexis Tsipras showed more willingness to compromise with creditors.
In a letter to Eurozone partners, he put forward new proposals accepting most of what was on the table before talks collapsed.
This revived investor confidence that a deal is on its way, despite Tsipras's confirmation that a nation-wide referendum on the proposed fiscal deal will definitely go ahead on Sunday.
At close, the FTSE 100 was up 1.34 per cent, while France's CAC 40 was up 1.94 per cent and Germany's DAX finished the day over two per cent higher. The Athens stock exchange remained closed for the third day in a row.
Confidence was also heightened in the US, where the Dow Jones industrial average traded about 110 points higher and the Dow futures leaped more than 160 points.
"Investors should have higher conviction we are back to trend (on economic growth)," David Lefkowitz, senior equity strategist at UBS, told CNBC. "I think it's mostly about Greece (and) a lot of volatility around what's happening in Europe.
Investors are now hopeful that a third bailout agreement will be reached, but what happens next is largely dependent on the result of Sunday's vote. This afternoon, German chancellor Angela Merkel said Germany would not be prepared to discuss any new deal with Greece until after the referendum.
There is widespread concern that a “no” would be the ultimate catalyst for the breakdown of Greece's relationship with the bloc, but in a speech today Tsipras said it would not mean a definite exit from the Eurozone.