The pan-European STOXX 600 <.STOXX> was up 0.8 percent by its close, with Germany's DAX <.GDAXI> rising 0.9 percent.

The dispute over migration had threatened to topple Merkel's fragile governing coalition, but in a breakthrough late on Monday evening her rebellious interior minister dropped his threat to resign after five hours of talks.

Equity markets have been jittery ahead of a July 6 deadline when the U.S. is set to slap tariffs on $34 billion worth of Chinese goods that Beijing has vowed to match with tariffs on U.S. products.

"Stocks are higher as improved political relations in Germany and constructive trade comments from China have lifted investor sentiment," David Madden, market analyst at CMC Markets UK, said, adding that the positive mood might not last.

Miner Glencore fell more than 8 percent after it said a subsidiary had received a U.S. Department of Justice subpoena requesting documents and records on compliance with the Foreign Corrupt Practices Act and U.S. money-laundering statutes.

The documents requested from subsidiary Glencore Ltd relate to the group's business in Nigeria, the Democratic Republic of Congo (DRC) and Venezuela from 2007 to present, Glencore said, adding it was reviewing the subpoena.

Another big faller was BE Semiconductor, the Dutch equipment maker, which lost nearly 9 percent after cutting its revenue forecast.

Societe Generale rose 0.6 percent and Commerzbank was up 0.6 percent after the latter agreed to sell its equity markets and commodities business (EMC) to the French bank.

(Reporting by Julien Ponthus and Kit Rees; Editing by Andrew Roche)

By Julien Ponthus