Investors cheered the first-round result of France's presidential election, which saw centrist Emmanuel Macron take a big step towards leading his country. Polls now put him comfortably ahead of far-right leader Marine Le Pen in the May 7 run-off.

The outcome lessens the risk of an anti-establishment shock on the scale of Britain's vote to quit the European Union and bolsters the case for closer ties between France and Germany.

Europe's STOXX 600 index <.STOXX> closed 2.1 percent higher, with France's CAC 40 <.FCHI> up 4.1 percent, posting its best day's gains since August 2012. Germany's DAX <.GDAXI> hit a new record high, up 3.4 percent, while Britain's FTSE <.FTSE> gained 2.1 percent.

"The clear reason for this rally is that European markets have been held back by political risk over the last 12 months," said Tim Stevenson, European equities fund manager at Henderson.

Europe's main gauge of equity market anxiety, the Euro STOXX 50 Volatility index <.V2TX> fell 8.8 points, wiping out the rapid surge it made this month when investors grew cautious in the run up to the French vote.

The euro briefly vaulted to five-month peaks and French bond yields fell to multi-month lows, halving the French/German two-year bond spread. [MKTS/GLOB]

Investors said they would start to concentrate on signs that European economies are improving.

"We decided early this morning to refocus our strategy on the very positive fundamentals in Europe, and to lift the protective overlays we had put in place on bond and stock futures," said Pascale Auclair, global head of investment at La Francaise Asset Management.

"Nonetheless, we will remain vigilant going into the (French) legislative elections."

If he wins the presidency, Macron will need to secure a working parliamentary majority for his young party in June, and then seek broad popular support for labour reforms that are sure to meet resistance.

BANKS, INDUSTRIALS DRIVE RISK-ON RALLY

French and Italian banks saw the biggest gains across the region with the euro zone's bank index <.SX7E> rising 7.4 percent to its highest level in 16 months.

Paris blue chips <.FCHI> hit their highest since January 2008, up 4.1 percent.

The top eight gainers on the pan-European index were banks, with UniCredit (>> UniCredit SpA), Credit Agricole (>> Crédit Agricole) and UBI Banca (>> Unione di Banche Italiane SpA) leading the way, up 13.2, 10.9 and 10.4 percent respectively.

Brokers including Goldman Sachs, Citi and Kepler Cheuvreux all came out heavily in favour of European banks on Monday morning.

Italy, considered to be especially vulnerable to any anti-European event, had an even stronger rally than France. Its FTSE MIB <.FTMIB> soared 4.8 percent to its highest since January 2016, driven by strong gains in banks <.FTIT8300> which jumped 9.1 percent.

Industrials were also in demand with shares in French construction companies Saint-Gobain (>> Compagnie de Saint-Gobain) and Vinci (>> Vinci) soaring 6.7 percent and 7.1 percent respectively, as investors turned their focus to their earning prospects.

Europe's construction and materials sector <.SXOP> had its best daily gains since last November's U.S. election, up 3.4 percent.

"There was already a case for this sector before the election, but now we are looking beyond and back to fundamentals," said Vincent Juvyns, global market strategist at JP Morgan Asset Management.

The rush into risky assets weighed on precious metal miners Randgold Resources (>> Randgold Resources Limited) fell 1.4 percent as prices of gold, seen as a safe haven asset, fell more than 1 percent.

Next up on investors' radars will be the slew of results poised to kick off European earnings season this week including heavyweight banks UBS (>> UBS Group AG) and Credit Suisse (>> Credit Suisse Group AG).

European first-quarter earnings are expected to rise 7.2 percent, according to Thomson Reuters I/B/E/S data. Excluding the energy sector, this would be a rise of 2.9 percent.

Shares in Akzo Nobel (>> Akzo Nobel) gained 5.1 percent after PPG Industries (>> PPG Industries, Inc.) raised its offer to $29 billion, increasing pressure on the Dutch paint maker to enter into acquisition talks.

(Reporting by Danilo Masoni and Helen Reid; Editing by Catherine Evans)

By Danilo Masoni and Helen Reid