European shares reversed their earlier declines to close slightly higher on Tuesday, with energy stocks limiting broader gains, while investors weighed the potential impact of a U.S. government shutdown on financial markets.

The pan-European STOXX 600 closed 0.5% higher, in its third consecutive session of gains. The index logged a quarterly rise and a third month in positive territory, its best showing since May. London's FTSE 100 hit an intraday record high.

Most sectors were on the rise, with media stocks gaining 1.2% and retail up 1.1%. Industrial and healthcare stocks provided the biggest boosts to the STOXX 600.

On the flip side, oil and gas stocks dipped 1.6%, logging their biggest one-day fall in more than three weeks. Investors are anticipating an increase in OPEC+ supply later this week, which has sent oil prices tumbling.

France's TotalEnergies and Britain's BP fell more than 1% each.

Other sectoral laggards included automobiles and parts, down 0.4% and travel and leisure stocks (SXTP), off 0.3%.

On Monday, U.S. Vice President JD Vance said that a government shutdown was likely as budget talks with Democrats had stalled. It could delay the release of the crucial jobs data, a key indicator of economic health, due later this week.

Markets have been hawk-eyed on labor market data in the U.S., which has shown a gradual deterioration, pushing the Federal Reserve to trim interest rates.

"A delay to the release of the non-farm payrolls report this week could trigger some volatility as this report was considered the last piece of the puzzle before the October Fed rate cut," said Kathleen Brooks, research director at XTB.

"However, we do not think that it will derail a rate cut next month."

European Central Bank President Christine Lagarde said the euro zone economy was handling U.S. tariffs better than previously expected, leaving inflation risks "quite contained".

It followed an inflation reading that suggested overall price growth had ticked up across the 20-nation currency bloc.

Meanwhile, the UK economy grew 0.3% in the second quarter, French preliminary inflation stood at 1.1% in September, and German inflation in four key states rose in line with forecasts.

Among individual stocks, Lufthansa tumbled 7.1% to the bottom of the STOXX 600, snapping five sessions of gains. The German airline could face a strike after pilots' union VC said members had voted in favour of a walkout in a dispute over pensions.

Puma gained 4.6% after BNP Paribas Exane upgraded the stock.

Hornbach fell 5% after the German DIY stores operator posted second-quarter adjusted earnings below expectations.

Source: Investing.com