A surprise move by the Bank of Japan to cut its key interest rate to virtually zero also lifted stocks worldwide. The dollar fell as investors shed defensive assets, and a gauge of U.S. stock market volatility fell.
The Institute for Supply Management reported that its index of business activity at U.S. service companies expanded again last month, and far faster than analysts were expecting. The ISM's measure of service companies encompasses a wide range of industries including finance, health care and trade.
It was the ninth-straight month of expansion in service businesses, which have been growing at a slower pace in the U.S. relative to the much smaller manufacturing sector. Service providers account for about 83 percent of all private employment in the U.S.
Traders are also hoping to get positive news from the beginning of corporate earnings reports this week and from another key economic indicator, the Labor Department's monthly jobs survey on Friday.
The Dow Jones industrial average rose 193.45 points, or 1.8 percent, to close at 10,944.72, its highest close since May 3 and its biggest gain since Sept. 24.
The Dow is still 2.3 percent below is 2010 high reached on April 26, and is up 5 percent for the year so far.
All but one of the 30 companies that make up the average rose, led by Boeing Co. and Bank of America Corp. American Express Co. fell again, a day after the company said it would fight an antitrust lawsuit, even after Visa and MasterCard settled similar suits.
The Standard & Poor's 500 index rose 23.72, or 2.1 percent, to 1,160.75. The index broke through 1,150, a level it hadn't traded above since mid-May, and kept on going.
Robert Pavlik, chief market strategist at Banyan Partners LLC in New York, cited another factor in today's upward swing: Even when stocks have fallen lately, the S&P 500 has managed to stay above 1,130, a key technical barrier that it had broken through on Sept. 20. He said that has given jittery investors confidence to buy.
"A lot folks who have cash on the sidelines are being drawn into the market because they don't want to be left behind," Pavlik says. "I think there's potential to get to 1,200 by the end of the year."
The Nasdaq composite index rose 55.31, or 2.4 percent, to 2,399.83.
Other market indicators also suggested growing confidence among investors. An index measuring the dollar against six major currencies fell 0.7 percent, the CBOE Market Volatility Index fell 7.2 percent to its lowest level since Sept. 24, and crude oil rose $1.35 to settle at $82.82 a barrel.
In a surprise move, Japan's central bank cut its key interest rate target to a range of zero to 0.1 percent, and is looking to buy government bonds in an effort to boost the faltering Japanese economy. Japan has been struggling with a strong currency and falling prices, and authorities there intervened in currency markets last month to weaken the yen, but the impact was short-lived.
Investors are also hoping for more action from the Federal Reserve to boost the U.S. economy, and got more encouragement from remarks by Fed Chairman Ben Bernanke late Monday. Bernanke said the economy could be helped by another round of asset purchases by the central bank, and hopes are building that the Fed could announce new measures at its next meeting Nov. 2 and 3.
Stocks were also trading higher in Europe. Britain's FTSE 100 rose 1.4 percent, Germany's DAX index rose 1.3 percent, and France's CAC-40 rose 2.3 percent. Hong Kong's Hang Seng index rose 0.1 percent.
About five stocks rose for every one that fell on the New York Stock Exchange, where consolidated volume was low at 4.8 billion shares. Volume has been relatively low throughout a strong rally that brought the Dow up 10.4 percent in September, sugggesting that many investors are still sitting on the sidelines.