European shares inched higher in early trade on Tuesday after forecast-beating economic data from Germany helped offset a poor reading of Chinese factory activity.

Figures showed Germany's private sector grew in March at its strongest rate since July, in a further sign that Europe's largest economy is gaining momentum.

France's private sector expanded for the second straight month, chiming with recent figures showing that economy is edging back to growth.

At 0850 GMT, the FTSEurofirst 300 index of top European shares was up 0.1 per cent at 1,602.56 points, after losing 0.7 per cent on Monday.

"The environment for the euro zone is getting extremely positive: low interest rates, a weakening euro and falling commodity prices, coupled with strong action from the ECB," said Christian Jimenez, fund manager and president of Diamant Bleu Gestion, in Paris.

"The only big risk seen in the medium term is the prospect of a rate hike by the Fed, but that's mostly priced in already."

Investors were also keeping a close eye on the euro, trading at $1.0982 against the dollar on Tuesday, pulling further away from a 12-year trough of $1.0457 hit last week.

European stocks have rallied strongly since the start of the year -- with Germany's DAX up 21 per cent, on track to record its best quarter since late 2003 -- as global investors bet that a weaker euro would boost the region's economy and corporate earnings.

"With FX moves dominating all else, European equities are now showing improving profitability through margin expansion. The market is yet to pay a full valuation for this in our view," BNP Paribas strategists wrote in a note.

Around Europe, Britain's FTSE 100 index was up 0.2 per cent, Germany's DAX up 0.3 per cent, and France's CAC 40 up 0.3 per cent.

Shares in Carrefour fell 1.5 per cent after the supermarket chain sold 12.7 million treasury shares, representing 1.7 per cent of its share capital, in a private placement.

Resource-related shares were under pressure, with Royal Dutch Shell down 0.2 per cent and Rio Tinto down 0.3 per cent, after data showed activity in China's factory sector dipped to a 11-month low in March as new orders shrank, signalling persistent weakness in the world's biggest consumer of commodities.

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