By Sara Sjolin
LONDON (MarketWatch)--European stocks ended mostly higher on Wednesday, staging a late-session comeback as investors regained hope that U.S. policy makers will agree on a deal to avert the "fiscal cliff."
The Stoxx Europe 600 index rose 0.1% to close at 273.15, adding to a 0.3% gain from Tuesday, when news of a debt-reduction deal for Greece sent markets higher.
"People are hypersensitive at the moment," said Douglas Roberts, senior international economist at Standard Life Investments, referring to jitters over whether U.S. Democrats and Republicans will reach a deal on the fiscal-cliff issues.
"But the two parties know that they have to compromise. None of them wants to be seen as causing recession and they don't want to risk another downgrade from the ratings agencies," he said.
Among Wednesday's notable movers, shares of United Utilities Group PLC rose 2.6%, after the firm reported a rise in six-month pretax profit and said it's on track to meet its regulatory targets.
Shares of Delhaize Group added 1.8%, after Exane BNP Paribas lifted the food retailer to outperform from neutral.
Shares of BP PLC fell 0.4%, after the U.S. Environmental Protection Agency said it has temporarily suspended the oil major from new contracts with the government.
The broader stock markets spent most of the session in negative territory after Senate Majority Leader Harry Reid late Tuesday expressed disappointment with the negotiations on reaching a deal to avert the billions in automatic spending cuts and tax hikes slated to start next year.
Markets, however, erased losses in late action, as House Speaker John Boehner said he was optimistic that a deal can be reached with President Obama to avoid the cliff.
"The U.S. authorities need to do something to reduce the deficit going forward. The fact that they are even talking about a fiscal cliff is obviously not something someone planned. They were just kicking a lot of cans down the road, and now the cans can't be kicked further at the end of this year," said Roberts from Standard Life.
Meanwhile, U.S. data weighed on sentiment as a report showed new-homes sales declined to an annual rate of 368,000 in October, which was below analysts' expectations.
Wednesday's volatile trading session came after the prior day's broad-based gains, when European bourses welcomed news that euro-zone finance ministers agreed on a road map for debt sustainability for Greece, clearing the way for the country's next bailout tranche.
The Athens General Index rose on the news, but slumped 2.9% to 822.72 on Wednesday, as shares of National Bank of Greece SA dropped 7.1%.
In Spain, shares of Bankia SA sank 9.3%, after the European Commission approved a bailout for the bank along with plans to help the ailing lender shrink its balance sheet.
The IBEX 35 index lost 0.3% to 7,837.60.
Banks were also among biggest decliners in the rest of Europe's trading action. Deutsche Bank AG dropped 1.9% in Frankfurt, while Commerzbank AG fell 1.3%. The DAX 30 index, however, closed 0.2% higher at 7,343.41.
In France, shares of BNP Paribas SA lost 0.3%. Shares of LVMH Moet Hennessy Louis Vuitton climbed 1.6%, after Nomura lifted the luxury-goods firm to buy from neutral.
Veolia Environnement SA shares rose 3.5%. HSBC lifted its rating on the firm to overweight from neutral.
Suez Environnement SA was also upgraded to neutral from underweight, sending it shares 2.4% higher.
France's CAC 40 index rose 0.4% to 3,515.19.
In the U.K., mining firms added pressure, as metals prices fell sharply. Shares of Rio Tinto PLC fell 1.3% and BHP Billiton PLC gave up 0.5%.
Pointing in the other direction, shares of Marks & Spencer Group PLC added 2.2%, after the firm agreed on a 10-year funding plan with its pension trustees.
Shares of Vodafone Group PLC picked up 0.9%, after Fitch Ratings affirmed the wireless telecom firm's rating at A- and said the outlook is stable.
The FTSE 100 index inched 0.1% higher to 5,803.28.
Write to Sara Sjolin at AskNewswires@dowjones.com