By Shashwat Chauhan, Nikhil Sharma and Pranav Kashyap

(Reuters) -European markets closed higher on Monday, as investor optimism was fuelled by a report suggesting that U.S. tariffs might be less severe than previously feared, boosting the automobile sector.

Europe's premier index, STOXX 600, closed up 0.9%, at its highest level in more than two weeks.

Major bourses across the region jumped, with France's CAC 40 up 2.2%, Germany's DAX up 1.5%, and Spain's IBEX 35 up 1.3%.

The auto sector surged nearly 3%, marking its best performance in over a year.

This surge came in response to a Washington Post report indicating that President-elect Donald Trump's team is considering a tariff strategy that would target only essential imports, potentially easing the pressure on European car manufacturers.

However, Trump later denied the report.

"It looks as if officials are already preparing to water down the worst of Trump's campaign promises by narrowing the scope of the tariffs," said Kyle Chapman, FX markets analyst at Ballinger Group.

"That means a lower footprint on global trade, a smaller impact on U.S. inflation, less restriction on the Fed's cutting cycle, and a smaller negative growth shock for the global economy versus what the market had been preparing for." 

Luxury brands with strong ties to China also rode the wave of optimism, with LVMH, Hermes, Kering and Richemont rising between 2.4% and 4.5%.

Meanwhile, the technology sector advanced 3.9%, led by ASML, ASMI and STMicroelectronics.

These companies were buoyed by Microsoft's announcement of a substantial $80 billion investment in data centres for AI model training by 2025.

As investors look ahead, the week promises a flurry of economic data, with inflation reports expected from across Europe.

Initial figures from Germany have already shown a higher-than-anticipated rise in inflation. Additionally, Germany's service sector experienced a slight uptick, even as the broader euro zone saw overall activity contract for a second consecutive month.

This week's centrepiece would be the December U.S. nonfarm payrolls report on Friday, a crucial metric to assess the Federal Reserve's interest rate path for 2025.

European equities lagged their U.S. counterparts in 2024, as concerns about a slowing economy, political turmoil in Germany and France and the threat of tariffs from the Trump administration made for an uncertain outlook.

Among individual movers, Rolls-Royce fell 2.6% after Citigroup downgraded the rating on the British engineering company to "neutral" from "buy".

With the holiday season winding down, trading floors are set to buzz back to life this week as investors and market participants return, promising a resurgence in trading volumes after two weeks of subdued, holiday-affected activity.

(Reporting by Shashwat Chauhan, Nikhil Sharma and Pranav Kashyap in Bengaluru; Editing by Mrigank Dhaniwala and Arun Koyyur, William Maclean)