Thin trading conditions and a better-than-expected purchasing-managers index for Germany boosted European stock markets to a higher finish on the first day of trading for the near year.

The Stoxx Europe 600 index XX:SXXP +1.07%  rose 1.1% to close at 247.15 on Monday. The index on Friday closed out 2011 with an 11.3% loss, the first yearly fall in three years and the worst annual performance since 2008.

Click to Play

Europe at brink: WSJ documentary

In this documentary, Wall Street Journal editors and reporters examine the origins of Europe's debt crisis and why it spread with such ferocity to engulf much of the Continent and threaten the entire world.

The push higher was led by the German DAX 30 index DX:DAX +3.00% , which rose 3% to settle at 6,075.52.

A wide swath of stocks contributed to that gain, with heavyweight engineering group Siemens AG DE:SIE +2.14%   SI +0.22% rising 2% and drug group Bayer AG DE:BAYN +2.56%  gaining 2.9%.

Chemicals group BASF SE DE:BAS +1.93% rose 2.3%, while insurer Allianz SE DE:ALV +4.05%  rose 3.8%.

German stocks, in particular, were boosted after the Markit/BME Germany Manufacturing purchasing-managers index rose to 48.4 in December from 47.9 in November. That final number was up from an earlier estimate of 48.1.

“German PMI were marginally stronger than expected, and anything better-than-expected in current market sentiment will lead risk appetite back in markets,” said Christian Tegllund Blaabjerg, chief economist at FIH Erhvervsbank, in emailed comments. And “with low liquidity you have a stronger reaction than usual in equity markets.”

Meanwhile, the Markit euro-zone purchasing-managers index rose in December to 46.9 from a 28-month low of 46.4 in November, confirming a previous estimate. Both readings, however, remained below the 50 level, indicating a further contraction in manufacturing activity. Read more about euro-zone PMI data.

Quiet trading

The absence of liquidity in markets on Monday was due to markets remaining closed in London and the United States in observance of the New Year holiday.

But once markets return in full on Tuesday, Blaabjerg said, there really isn’t much pointing to “a light at the end of the tunnel” for Europe, and European stocks could face renewed pressure.

“The U.S., however, is a whole different case. I am betting my silver dollar on the U.S. growth outlook in 2012 -- the housing market has bottomed out, and once this happens the U.S. is coming back strongly,” he said.

Bond yields steady

European bond yields were largely steady across the board, with the yield on Italy’s 10-year government bond IT:10YR_ITA -0.07%  up 2 basis points to 6.88%. The Italy FTSE MIB index XX:FTSEMIB +2.42%  rose 2.4% to 15,454.60.

The market was led by a 3.7% rise for insurer Assicurazioni Generali SpA IT:G +3.70%  and a 2.8% rise for bank Intesa Sanpaolo SpA IT:ISP +2.78% .

The French CAC 40 index FR:PX1 +1.98%  rose 2% to 3,222.30, with BNP Paribas SA FR:BNP +3.10%  up 3.1% and heavyweight energy group Total SA TOT +0.12%   FR:FP +1.27%  up 1.3%.

Spanish and Portugal stocks were also not left out of gains, with the IBEX 35 index XX:IBEX +1.84%  rising 1.8% to 8,723.80 and the Portugal PSI 20 index PT:PSI20 +2.13%  jumping 2.1% to 5,611.37. Banks were the main gainers for those indexes.

Spanish stocks rose despite Friday’s government announcement that the budget deficit will hit around 8% in 2011, far exceeding the prior government’s target of 6%.

“We need to wait until tomorrow to see how the market takes the news of the 8% deficit,” said José Carlos Díez, chief economist at Intermoney, in emailed comments.

The alternative energy sector was active on Monday. Away from the Stoxx 600, shares of German solar-panel maker Sunways AG DE:SWW +27.49%  shares soared 21.3% after the company said that China-based LDK Solar Co. LDK -0.96%  will buy 33% of the firm and then offer to buy the rest of the shares for 1.90 euros each.

Shares of Vestas Wind Systems AS DE:VWS +7.77%  rose 7.3%.

On the downside, shares of Storebrand ASA NO:STB -3.54%  fell 3.5%, the top decliner in the Stoxx 600. Storebrand and other Norwegian insurers have reportedly received thousands of claims in the wake of storm Dagmar that swept over Sweden, Finland and Norway with hurricane-strength winds on Dec. 26 and Dec. 27.