Encouraging signs out of Europe and a surprisingly strong report on the U.S. housing market drove the Dow Jones Industrial Average up more than 300 points, or nearly 3 percent. It was the best day for stocks this month.
The Spanish government pulled off a successful debt auction and gauges of business and consumer confidence in Germany rose unexpectedly. Both helped ease worries about Europe's debt crisis. The dollar fell against the euro and U.S. government bond prices dropped as traders shifted money out of the safest assets.
Borrowing costs for the Spanish government plunged at an auction of short-term debt, a sign that bond buyers are more confident in the country's ability to pay them back.
"Spain has plenty of problems, large debts and budget deficits," said Sam Stovall, chief equity strategist at S&P Capital IQ. "So when we see debt auctions go much better than expected it's very encouraging."
Spain's government raised 5.6 billion euros ($7.3 billion), much more than its goal of 4.5 billion euros. Investors demanded an interest rate of only 1.74 percent to lend to Spain for three months, a steep fall from the 5.1 percent at an auction in November.
The Dow gained 337.32 points, or 2.9 percent to close at 12,103.58. It lost 100 points the day before.
Europe's major stock markets also climbed. Germany's DAX soared 3.1 percent. France's CAC-40 jumped 2.7 percent.
The gains held on Tuesday afternoon even after the U.S. House of Representatives rejected a plan to extend a cut in Social Security taxes. Unemployment benefits for 2 million people are also at risk.
A Federal Reserve proposal for stricter rules on larger banks didn't knock down JPMorgan Chase, Citigroup and other big bank stocks. JPMorgan Chase & Co. gained 4.9 percent. Citigroup added 4.6 percent.
The Standard & Poor's 500 index gained 35.95 points, or 3 percent, to 1,241.30. Only six stocks in the index fell. The Nasdaq composite index rose 80.59, or 3.2 percent, to 2,603.73.
Analysts cautioned that recent big rallies in the stock market have been quick to fade as traders seize the chance to sell stocks and lock in gains. "If you're selling into rallies, it means people want out," said Quincy Krosby, Prudential Financial's market strategist. "They don't believe it's sustainable."
Take the Dow's 490-point jump Nov. 30 after major central banks made a coordinated move to prop up European lenders by freeing up cash. The one-day rally brought the Dow to 12,045, but that gain had evaporated by last week.
The Commerce Department said Tuesday that builders broke ground on 685,000 new homes last month, a 9.3 percent jump from October. That's the highest level since April 2010. Building permits, a gauge of future construction, increased 5.7 percent, spurred by a jump in apartment permits. Stovall said the surge in housing construction was another piece of evidence that the U.S. will avoid slipping into another recession soon. "It's great news," he said.
The report drove housing stocks higher. PulteGroup Inc. jumped 10 percent. D.R. Horton Inc. rose 5.7 percent.
In other corporate news,
— General Mills Inc. dropped 1 percent after reporting that its quarterly profit sank 28 percent. The maker of Cheerios and Yoplait yogurt blamed higher costs for ingredients and packaging for pinching profit margins.
— AT&T Inc. rose 1.3 percent after the company abandoned its bid late Monday to acquire the wireless provider T-Mobile USA. Sprint Nextel Corp. gained 5 percent. Sprint, the No. 3 wireless carrier, had opposed the deal.
— Red Hat Inc. plunged 8.9 percent after the software company forecast revenue that was short of what analysts were expecting. Red Hat provides support to business users for the freely distributed Linux operating system.
— Oracle Corp. dropped 8 percent in extended trading after the business software giant's quarterly earnings and sales missed analysts' estimates.
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