European stocks rose on Friday, pushing the German DAX towards record highs as signs of progress in U.S. debt ceiling negotiations encouraged investors to pile into riskier assets.

The pan-European STOXX 600 index rose 0.6%, set to end the week with modest gains.

Sectors sensitive to the health of the economy such as financial services, miners and construction and materials were the top gainers in Europe.

The German DAX rose 0.6% after closing at its strongest level of 2023 on Thursday. The index is trading less than 40 points below its all-time high of 16,290.19, hit in November 2021.

Wall Street's S&P 500 and Nasdaq notched their strongest close in over eight months on Thursday, driven by optimism that a U.S. debt ceiling deal could be reached within days.

"If there is a deal, the immediate equity market reaction would be a little bit of a rally. I don't think equities would shoot up massively because we're also probably going to get an upward movement in bond yields," said Paul Danis, head of asset allocation at RBC Brewin Dolphin.

"On a 12-18 month view, I don't see much upside in equities. There's not that much room for economies to grow and inflation pressures are still strong."

Data showed German producer prices rose slightly more than expected to 4.1% in April, on a year-on-year basis, likely keeping the European Central Bank on course for more interest rate hikes.

While the Fed has left the door open for a pause in its aggressive monetary tightening cycle, the ECB has signalled that more interest rate hikes are on the cards. Federal Reserve Chair Jerome Powell and ECB President Christine Lagarde are scheduled to speak at separate panel discussions later in the day.

European tech shares, however, hit an over one-year high following a rally in Wall Street peers as investors bought into high-growth stocks.

Shares of semiconductor companies such as AMS and Nordic Semiconductor rallied more than 6% each as Swiss and Norwegian markets reopened after a holiday on Thursday.

Troubled Swedish real estate group SBB fell 6.8% to a fresh five-year low after Goldman Sachs cut price target by 50% to 5 Swedish crowns. The stock has shed more than half of its value this month on concerns about the group's debt. (Reporting by Sruthi Shankar in Bengaluru; Editing by Savio D'Souza and Saumyadeb Chakrabarty)