Spain's main stock market index Ibex-35 rebounded on Wednesday and was testing 9,400 points after the Italian government softened its stance on a new bank levy, which sent financial institutions reeling the day before.

Rome has set a ceiling of 0.1% of total bank assets for the new tax on extraordinary interest margin, after the conservative government's unexpected announcement on Tuesday sent banking shares tumbling in the session.

European markets remain on watch for other countries to announce measures similar to Italy's, while focusing on CPI data from major economies.

Earlier on Wednesday, consumer prices in China showed that the world's second largest economy entered deflation in July, a negative sign for global growth prospects, although it could help to dampen inflationary forces internationally.

Attention now turns to the imminent US inflation report, due on Thursday following dovish comments from several Federal Reserve policymakers this week.

With the next US policy meeting not scheduled until September, the Fed still has plenty of time to watch key price data.

In this context, at 07:05 GMT on Wednesday, Spain's selective Ibex-35 stock market index was up 99.80 points, or 1.07%, to 9,401.60 points, which it had not touched since August 1, while the FTSE Eurofirst 300 index of large European stocks was up 1.00%.

The banking sector recovered from the previous day's setback. Santander rose 1.73%, BBVA gained 1.64%, Caixabank advanced 1.31%, Sabadell gained 1.64%, Bankinter gained 1.27% and Unicaja Banco rose 1.71%.

Among the large non-financial stocks, Telefónica gained 0.77%, Inditex advanced 1.75%, Iberdrola gained 0.32%, Cellnex fell 0.28%, and the oil company Repsol rose 1.35%.

(Report by Flora Gómez; edited by José Muñoz)