London - European stocks rose back towards five and a half year highs on Tuesday, boosted by strength in the region's periphery and lower than expected unemployment figures from Germany.

Scandinavian stocks were also strong and provided many of the top gainers, playing catch-up after much of the Nordic region was shut on Monday for a market holiday.

A flat open on European bourses turned positive after Germany reported an unexpected drop in unemployment, with gradual gains leaving the pan-European FTSEurofirst 300 up 0.5 percent at 1,315.86 by 1036 GMT.

The rise comes after a weak start to the year but leaves the index just 0.3 percent off the 5-1/2 year high touched on the first trading day of 2014.

“An unexpected drop in German unemployment has been enough to tempt the bulls back to the table as they look to test the New Year's correction, with Europe moving higher across the board,” Toby Morris, senior sales trader at CMC Markets, said.

Spanish blue chips outperformed for a second straight day, up 1.6 percent, receiving a boost from Sacyr , which gained 5.8 percent after the Panama Canal authority proposed an end to a dispute with a Spanish-led consortium fronted by the construction firm.

Banks in Spain also gained strongly on better prospects for the domestic economy, with Banco Popular's 5.5 percent gain leading FTSEurofirst 300 stocks.

Spain outperformed among European shares on Monday as well, buoyed by better than a expected PMI services sector data.

“Spain has had to make massive changes, but they've done it, and they're starting to see the benefits in their PMIs. They're demonstrating how reform is supposed to happen,” Nick Xanders, who heads equity research at BTIG, said.

Portuguese stocks hit a three-year high, and good demand for an Irish sovereign bond also lifted sentiment around the euro zone's previously struggling economies.

Danish shipping and oil group A.P. Moller-Maersk gained 4.2 percent, the second top riser in Europe, after agreeing to sell 49 percent of Dansk Supermarked, Denmark's largest retailer, to focus on core businesses.

While Denmark was not shut for a holiday on Monday, Sweden and Finland were, and Stockholm-listed truckmaker Volvo gained 4 percent, with the exchange open for the first time since data showed that orders for heavy trucks in North America rose 50 percent in December compared to November.

Traders said that now the holiday season had finished, volumes should return to the market, helping European shares shrug off their slightly weak start to the year.

“We have seen the market start the year on low volumes, much of which we have seen as some natural portfolio adjustments into the first quarter of 2014,” Atif Latif, head of trading at Guardian Stockbrokers, said.

“Now as the volumes are starting to pick up we have seen some strong production figures followed by macro data that continued to show strength... We maintain (a) bullish market outlook.” -Reuters