The closely-watched purchasing managers index rose to 56.7 in July from 56 in June, a bigger-than-expected jump.
US stocks gained 1.9% in morning trade, while Paris closed 3% and Frankfurt 2.5% higher, with London gaining 1.9%.
The news came as a contrast to downbeat comments by the US Federal Reserve’s Ben Bernanke on Wednesday.
The Dow Jones index fell 1% in Wednesday’s session after Mr Bernanke warned that the country’s economic outlook remained “unusually uncertain”.
He said record low interest rates would still be needed to support the economic recovery.
Both constituents of the PMI index, compiled by data provider Markit, rose in July.
The service sector index rose to 56 from 55.5 in June, while the manufacturing index rose from to 56.5 from 55.6. Any score over 50 indicates growth.
“We were very surprised, it’s a good start to the second half of the year,” said Chris Williamson at Markit.
Investors were also buoyed by the data. In the US, the Dow Jones index rose 1.9% by lunchtime, while France’s Cac 40 index closed 3.05% up, Germany’s Dax climbed 2.53% and the UK’s FTSE 100 went up 1.9%.
The euro also benefited from positive sentiment, rising 1.5 cents against the dollar to $1.2903. The pound was less badly affected by the single currency’s strength and was down only marginally, buying 1.1836 euros on the money markets.
Earlier, shares in Tokyo closed lower after the Fed chairman’s comments on the US economy, and there had been fears that European stocks would follow suit.
However, the PMI data boosted “hopes that the eurozone will see decent growth in the third quarter after a likely marked pick-up in the second quarter”, said Howard Archer at IHS Global Insight.
But despite the short-term optimism, both Mr Williamson and Mr Archer warned that economic growth in Europe could slow in the coming months.
Investors are awaiting the results of the European bank stress tests that will be published on Friday evening.
These should reveal the capital strength of Europe’s leading banks, including the extent of bad loans that remain on their books following the financial crisis.
The results will help determine the mood of investors next week.
However, there are fears that the results will not allay concerns about the strength of the banking sector.
If too many banks fail, investors will be concerned about the banks’ ability to withstand future shocks to the financial system.
But if too many pass, analysts say, then questions will be raised about whether the tests were stringent enough.