LONDON (MarketWatch) — Greek stocks rallied the most in 3 ½ years on Tuesday, inspiring solid gains for the rest of Europe, as Greece’s finance minister said the country won’t ask the eurozone for a debt haircut.

The Athex Composite index GD, -0.71% surged 11% to close at 840.57, marking its best daily percentage performance since August 2011. Borrowing costs for Greek government bonds declined sharply, with the yield on 10-year paper falling 1.585 percentage points to 9.601%. The yield on Greek 5-year government bonds dropped 2.454 percentage points to 12.782%, according to electronic trading platform Tradeweb.

Greek debt deal: The solid moves in Greek assets came after Finance Minister Yanis Varoufakis late Monday reportedly backed down from demanding a haircut on Greece’s debt and instead laid out a plan that includes debt swaps. The plan, dubbed “smart debt engineering” by Varoufakis, according to the Financial Times, is aimed at lifting the burden of repaying the debt to international lenders by replacing some of the current debt with growth-linked bonds and perpetual bonds. Read: Greek finance minister calls for bridge debt agreement

“Whether the combination of growth-linked and perpetual bonds that have been proposed are workable is open to question, but it does seem that Syriza have blinked first in this standoff after a very feisty Week 1 of their new administration,” said Jim Reid, credit strategist at Deutsche Bank in a note.

After meeting Italian government officials on Tuesday, Varoufakis will move on to Frankfurt on Wednesday to discuss the debt deal with European Central Bank President Mario Draghi. There were already rumors on Tuesday that the ECB will reject debt-swap plan.

Greek banks: Banks rallied in Athens on hopes the debt-restructuring plan will bring Greece and its eurozone partners closer to agreeing on changes to the bailout program. Eurobank Ergasias SA EUROB, -1.99% jumped 18%, National Bank of Greece SA ETE, -0.51% climbed 21%, Alpha Bank AE ALPHA, -2.52% rose 14%, and Piraeus Bank SA TPEIR, -0.38% gained 18%.

Other markets: The optimism over progress in Greece’s debt renegotiations boosted markets across Europe. The Stoxx Europe 600 index SXXP, -0.66% picked up 0.8% to 370.28, rising for a second straight day.

France’s CAC 40 index PX1, -1.21% put on 1.1% to 4,677.90, while the U.K.’s FTSE 100 index UKX, -0.70% climbed 1.3% to 6,871.80. Germany’s DAX 30 index DAX, -0.69% gained 0.6% to 10,890.95, an all-time closing high.

Movers: BP PLC UK:BP BP, -3.47% added 2.8% after the oil giant slightly increased its annual dividend and said it’ll cut costs in response to the slide in oil prices.

Banco Santander SA SAN, -3.78% SAN, -3.34% gained 4.6% after the Spanish bank reported a solid rise in fourth-quarter profit.

Data: The Spanish government said the number of people seeking jobless benefits last month rose at the slowest pace of any January since 2007.

The U.K.’s construction purchasing managers index rose to 59.1 in January from 57.6 in December, marking the 21st straight month the index has been above the 50 level that separates expansion from contraction.

In Italy, fresh data showed consumer prices dropped in January on lower energy prices. Inflation came in a negative 0.4%, the lowest level on record.