European shares extended gains to trade near a record high on Monday, as defence stocks received a boost on prospects of higher military spending by the region.
The pan-European STOXX 600 index (.STOXX) was up 0.3% at 0932 GMT, set to build on ten straight weeks of gains.
The European aerospace and defence index (.SXPARO) surged 6.5% to a record high after the continent's leaders agreed, over the weekend, to boost defence spending and draw up a Ukraine peace plan to present to the United States.
Rheinmetall (RHMG.DE) surged 11.4% to a record high, BAE Systems (BAES.L) jumped 13.5% and Leonardo (LDOF.MI) advanced 11.6% and Rolls-Royce (RR.L) was up 5.7%.
France's Thales (TCFP.PA) and Dassault Aviation (AM.PA) were up 11.7% and 13.4%, respectively.
Providing an additional boost was a Reuters report that said the parties in talks to form Germany's new government were considering setting up a defence fund.
German blue-chip index (.GDAXI) jumped 0.9%, hovering near a record peak.
"The market is rising on this optimism over defence spending and potential for a peace plan which is not only boosting defence stocks, but it's also boosting optimism broadly," said Fiona Cincotta, senior market analyst at City Index.
Exerting some pressure on equities, Germany's 10-year Bund yield , the euro zone benchmark, rose 4 basis points to 2.42%.
Interest-rate sensitive real estate (.SX86P) lost 1.5%, while utilities (.SX6P), which are often traded as bond proxies, shed 0.9%.
On the economic front, the long-running downturn in the euro zone's manufacturing industry showed further signs of easing last month as demand fell at the slowest pace in almost three years, a survey showed on Monday.
The European Central Bank will be in the spotlight ahead of its policy meeting later this week. While a rate cut is widely expected, the focus will be on the central bank's comments amid widespread uncertainty after U.S. plans for "reciprocal" tariffs on the European Union.
Escalating global trade war added some caution after a report said Beijing was preparing counter measures against fresh U.S. import tariffs.
U.S. President Donald Trump last week threatened China with an extra 10% duty set to take effect on Tuesday, which would result in a cumulative 20% tariff.
Moreover, U.S. levies on Canadian and Mexican imports will also come into force from Tuesday.
Shares of Bunzl (BNZL.L) fell 6% after the business supplies distributor reported a 3.6% fall in annual profit.
