The Dow Jones industrial average soared 95.51 points to 12,837.33, its highest close in a month. Microsoft was one of the biggest gainers in the Dow. The stock jumped 3 percent after the company announced a new tablet computer called Surface to compete with the immensely popular iPad from Apple. Microsoft was up 86 cents at $30.70.
Stock traders are also latching on to recent signals from the Federal Reserve that the central bank may reveal plans to stimulate the economy at the end of its two-day meeting Wednesday.
"A good portion of today's strong market action is from a hope factor that we're going to get more easing from the Fed," said Peter Cardillo, chief market economist at Rockwell Global Capital.
Economists say that even if the Fed does not act after its meeting, it will send a clear message that it is standing by to do so if needed.
Financial companies were among the best performing stocks as investors hoped for Fed action: Bank of America soared 4.5 percent, Citigroup gained 3.5 percent, JPMorgan Chase was up 2.2 percent and Morgan Stanley rose 3 percent.
Bank investors were also pleased to learn that a federal housing agency will clarify the process under which home lenders are forced to buy back soured home loans. The buybacks have cost banks billions of dollars. The uncertainty surrounding how much loans they will have to repurchase from the government has led them to reduce lending.
The agency's statement comes just as the housing market is showing signs of healing. American builders broke new ground on more single-family homes in May and requested more permits to build homes and apartments than they have in the past three and a half years.
The Commerce Department also said April was much better for housing starts than first thought. The government revised the figures up to 744,000, the fastest building pace since October 2008.
Material stocks rose on the prospect of demand from home construction. US Steel rose over 9 percent and Freeport-McMoran Copper rose over 3 percent.
In other trading, the Standard & Poor's 500 index rose 13.20 points to 1,357.98. Seven of the 10 industry groups in the S&P rose. The technology-heavy Nasdaq composite index rose 34.43 points to 2,929.76. The Dow Jones Utility average touched the highest level since August 2008 before closing slightly lower.
In Europe, borrowing costs eased for Spain: its benchmark 10-year bond yield fell below the key 7 percent level to 6.99 percent.
Spain raised $4.28 billion in an auction of 12- and 18-month bills, more than analysts had expected. However Spain's cost to raise the money skyrocketed. The Spanish government had to pay an interest rate of 5.07 percent for the 12-month bills, up sharply from 2.98 percent at the last such auction on May 14.
Still, investors were heartened to see that people were willing to lend Spain money.
"Even though it cost Spain dearly and yields rose to a record, the fact is that it was not shut out of the markets," said Cardillo.
Major European stock markets rose: Spain's IBEX 35 index rose 2.7 percent. Germany's DAX added 1.8 percent and France's CAC-40 rose 1.7 percent.
The dollar and Treasury prices fell as traders moved money out of low-risk assets. The dollar fell about a penny against the euro to $1.27 and the yield on the 10-year Treasury note rose to 1.62 percent from 1.58 percent late Monday.
Among other stocks making big moves:
-- Oracle soared 84 cents, or about 3 percent, to $27.96 after the software maker surprised investors with the early release of its fourth-quarter earnings. The results beat Wall Street's forecasts, and the company said new software licenses increased sharply.
-- J.C. Penney plunged $2.08, or 8.5 percent, to $22.25 after the chain store announced that Michael Francis, the former Target executive brought in to help redefine the company's brand, was leaving the company. It was the biggest loss of any stock in the S&P 500.
-- Barnes & Noble fell 61 cents, or 4 percent, to $14.63 after the book store chain reported a wider loss than Wall Street was expecting. It also reported that its Nook e-reader sales fell 11 percent in the quarter.
-- Walgreen plunged $1.87, or 5.85 percent, to $30.09 after the company said it is buying a $6.7 billion stake in European health and beauty retailer Alliance Boots. Investors worried about a deal that would expose the biggest U.S. drugstore chain to a continent beset by worries of a recession.
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