(Adds analyst comments, stocks on the move)
SYDNEY, July 9 Australian shares rose 1.4 percent on Tuesday, underpinned by banks and defensive stocks, as a positive lead from European and U.S. markets buoyed investor sentiment following last week's volatility.
Major banks all traded higher. Top lender Commonwealth Bank of Australia jumped 1.5 percent, while junior Australia and New Zealand Banking Group rallied 2.3 percent.
The S&P/ASX 200 index gained 69.1 points to 4,878.6 by 0149 GMT. The benchmark fell 0.7 percent on Monday.
"Market focus is going to be the U.S. reporting season, and the Alcoa result was modestly better than anticipated," said Martin Lakos, division director at Macquarie Private Wealth in Syndey.
Australia's earnings season was also expected to be "slightly on the upside", IG market strategist Evan Lucas said in a note.
"Bad news has been deliberately laid on the table and history trends show that most stocks see a wave of optimism into results and a slight spike post-reporting," he said.
The benchmark index extended gains after China's annual consumer inflation quickened to 2.7 percent in June from May's 2.1 percent, above market expectations.
Meanwhile, a survey showed that Australian business conditions weakened sharply in June, though a drop in the local dollar seemed to lift optimism at some firms.
The Australian market had been volatile for the past week on concerns about the U.S. Federal Reserve's plans to curtail its stimulus later this year, and on signs of slowing growth in China.
"The market seems to be getting more comfortable with the whole commentary around tapering," Lakos said. "We've seen a period of volatility, and I think the market starts to settle down a little bit."
Global miner BHP Billiton Ltd rose 1.7 percent, while Rio Tinto Ltd gained 1.2 percent, supported by firmer metal prices.
Consumer stocks gained on across-the-board buying. Supermarket Woolworths Ltd added 1.8 percent, while rival Coles owner Wesfarmers Ltd climbed 1.9 percent.
Pharmaceutical products maker CSL Ltd jumped 1.7 percent on the easing Australian dollar.
New Zealand's benchmark NZX 50 index rose 0.5 percent to 4,515.2.
STOCKS ON THE MOVE
* Alumina Ltd jumped 2.2 percent to A$1.02, after its U.S. partner Alcoa Inc reported a larger-than-expected profit on productivity gains across all units.
* Gold miner Medusa Mining Ltd dived 17.3 percent to a two-week low of A$1.37, after the company said late on Monday that the commissioning of its new Co-O Mill was delayed by four to five weeks.
(Reporting By Maggie Lu Yueyang; Editing by Eric Meijer)