Some strategists have forecast limited gains in the first quarter for European equities, following a strong run in the second half of 2012 after the European Central Bank pledged new measures to tackle the debt crisis which had led to fears of economic implosion.
However, traders said that those betting on a market fall with 'short' positions were increasingly cancelling those bets to cover their losses and instead buying, contributing to the market rally.
The pan-European FTSEurofirst 300 index ended up 0.3 percent at 1,171.06 points - a new closing high for 2013. Earlier in the day, the index had reached an intraday high of 1,171.78 points, its best level since early March 2011.
The euro zone's blue-chip Euro STOXX 50 index gained 0.5 percent to 2,722.96 points, with stock markets further boosted after the U.S. S&P 500 index rose above the key 1,500 point level for the first time since December 2007.
Mirabaud Securities' European equity sales executive Rupert Baker said investors were prepared to overlook lingering signs of economic weakness, such as a downturn in France, and were favouring German equities over other regional European markets.
PMI business survey data from Germany showed its private sector expanding at its fastest pace in a year this month. But in France it showed a deepening downturn.
Baker added that investors were increasingly moving away from bonds and cash - where returns have been hit since interest rates have been held at near record lows - to equities, which offer better returns via dividend payouts.
"People want to see the glass half-full," said Baker.
"There's a lot of cash around not earning very much money, and some of that has to go into equities," he added.
VODAFONE AND ROCHE RISE
Gains at heavyweight telecoms stock Vodafone and pharmaceuticals company Roche added the most points to the FTSEurofirst 300 index.
Vodafone rose 3.2 percent, which traders said was partly due to comments from major U.S. hedge fund manager David Einhorn who told investors this week that he had added to his position in Vodafone.
Traders added that renewed speculation that Vodafone might sell its stake in the Verizon Wireless venture with U.S. group Verizon had also boosted Vodafone.
Roche rose 1.6 percent, which traders said was due to an approval by the U.S. Food & Drug Administration (FDA) for its Avastin product.
However, mobile phone maker Nokia fell 5.5 percent after announcing plans to axe its dividend in order to shore up its cash position.
Analysts at Bank of America Merrill Lynch kept an "underperform" rating on Nokia, writing in a research note that Nokia's gross margins and channel inventories were "not encouraging."
The Euro STOXX 50 index has a current relative strength index (RSI) reading of around 63 points - below the 70 point mark which means an index is in technically "overbought" territory, and suggesting it has room to rise in coming days.
The Euro STOXX 50 is also trading above the index's 200-day and 50-day simple moving average levels, which are further technical indicators to suggest the index has scope for more gains.
Moustapha Awada, who heads up quantitative trading firm Sunofia Advisers, said worries over the U.S. debt situation and the possibility of slower Chinese economic growth could lead to a pullback on equities in the first quarter.
However, he expected an overall rally during the course of 2013.
"We could potentially see some pullback from debt ceiling problems in the U.S. and slower growth in China, but I see the potential for equities to keep going up," he said.