Microsoft Corp (MSFT.O) will be in focus after it admitted its largest acquisition in the Internet sector was effectively worthless and wiped out any profit for the last quarter. Microsoft shares traded in Frankfurt (MSFT.F) eased 0.8 percent.

European stocks climbed for the third session in a row as a recent raft of weak U.S. and European macro data has raised investors' expectation that central banks will soon take fresh policy action to kick-start their economies.

A majority of analysts expect the European Central Bank to trim interest rates at its policy meeting on Thursday, with most predicting a 25 basis point cut to 0.75 percent. The survey was taken before European leaders agreed a more flexible use of euro zone rescue fund late last week, but given recent economic data and rhetoric from the central bank's policymakers, analysts are still betting on more monetary easing.

Monday's U.S. ISM manufacturing index, which registered a contraction in the sector for the first time since July 2009, also boosted speculation that the Federal Reserve will announce it will embark on a third round of asset purchases, known as 'QE3', perhaps as soon as the central bank's next policy meeting from July 31 to August 1.

On the macro front, investors awaited the Institute for Supply Management-New York June index of regional business activity, due at 9.45 a.m. EDT, and May factory orders, due at 10 a.m. EDT. Economists in a Reuters survey expect a rise of 0.2 percent in factory orders compared with a 0.6 percent decline in April.

Barclays Plc (BARC.L) Chief Executive Bob Diamond quit with immediate effect on Tuesday over an interest-rate-rigging scandal, becoming the highest-profile victim so far in a probe that spans a dozen major banks across the world.

A U.S. judge on Monday rejected a request by Samsung Electronics Co. (005930.KS) to lift a ban on U.S. sales of its Galaxy Tab 10.1, another setback for the South Korean firm in its tablet patent battle with iPad maker Apple Inc. (AAPL.O).

U.S. investment management firm BlackRock (BLK.N) is buying Swiss Re's (SRENH.VX) European private equity and infrastructure fund of funds franchise, it said on Tuesday.

Activist investor Carl Icahn said on Monday he intends to look into disclosures that Forest Laboratories Inc (FRX.N) CEO Howard Solomon made before selling stock in the U.S. drugmaker over the years, launching the latest salvo in his proxy fight against the company.

U.S. states and localities have run up more than $2 trillion of unfunded pension liabilities, Moody's Investors Service said on Monday, citing data on plans offered by 8,500 local governments and over 14,000 individual entities.

U.S. stocks edged higher on Monday, shaking off a surprise contraction in U.S. manufacturing, which some investors took as a signal the Federal Reserve will take more forceful actions to boost the economy.

The Dow Jones industrial average .DJI eased 8.7 points, or 0.07 percent, to 12,871.39. The Standard & Poor's 500 Index .SPX rose 3.35 points, or 0.25 percent, to 1,365.51. The Nasdaq Composite Index .IXIC added 16.18 points, or 0.55 percent, to 2,951.23.

(Reporting by Blaise Robinson; Editing by Louise Ireland)

• A Permanent Economic Emergency