Equities rose amid newfound optimism Europe will get its act together on containing the region's fiscal crisis while US economic data suggested the outlook may not be as bleak as some fear.
Part of the optimism was derived from German Chancellor Angela Merkel's comments on Wednesday that she was willing to act quickly to recapitalise Europe's banking sector.
"Solving the sovereign crisis today is unrealistic because we are in the midst of a political crisis. So an interim solution is to make the banks safe and put precautionary capital into the banking system, to recognise people's concern and say 'Here is capital to reassure the bond market'," Mike Harrison, bank analyst at Barclays Capital, told Reuters.
In afternoon trading in New York, the Dow Jones Industrial Average rose 0.73 per cent, the Standard & Poor's 500 Index climbed 1.13 per cent and the Nasdaq Composite Index gained 1.80 per cent.
"The market is getting a little more confident that policy makers are more serious about tackling the problems," Richard Batty, strategist at Standard Life Investments, told Reuters.
Although it was "helpful to see a road map" that could give investors a clearer expectation of what might be ahead, Batty was sceptical until he saw a "concrete plan" in place.
While losses of financial shares were limited today, concern that the economic turmoil has curtailed profit growth remained.
Analysts estimate that financial companies in the Standard & Poor's 500 Index will report third-quarter earnings just 3.9 per cent higher than a year earlier, instead of the 14.6 per cent increase they forecast on August 1, according to Thomson Reuters Proprietary Research.
Economic data released today underpinned cautious optimism that a recession may not be in the cards after all.
The Institute for Supply Management said its US services index slipped to 53.0 in September from 53.3 in August. Orders increased though employment dropped to its lowest level in nearly 1-1/2 years.
Separately, a report from payrolls processor ADP showed overall private payrolls rose by 91,000, which exceeded economists' expectations for an increase of 75,000. The government's September payrolls report is due Friday.
"The economy is not tipping into another recession but is instead stuck in the mud at a below-potential rate of growth," Omair Sharif, an economist at RBS in Stamford, Connecticut told Reuters.
In Europe, the Stoxx 600 Index gained 3.1 per cent. Investors will be paying close attention tomorrow of what the European Central Bank has to say about the current situation.
Investors broadly expect the European Central Bank to unveil on Thursday plans to pump more liquidity into the market, probably by offering one-year funds to struggling banks - a crisis tactic it last used at the end of 2009.
Economists polled by Reuters expect the ECB to keep interest rates steady, though some in money markets say it may cut in President Jean-Claude Trichet's last monetary policy meeting.
As for Merkel's position, she said troubled banks needed to first seek capital on their own and national governments would help if that's not possible.
"If a country cannot do it using its own resources and the stability of the euro as a whole is put at risk because the country has difficulties, then there's the possibility of using the EFSF," the European Financial Stability Facility, she said, according to a Bloomberg report.