Disappointing economic data was deemed positive by investors who are betting that the US central bank will have to act to prop up the sluggish pace of recovery.
In late trading, the Dow Jones industrial average climbed 1.76 per cent, the Standard & Poor's 500 Index rose 2.02 per cent while the Nasdaq Composite Index advanced 2.81 per cent. Across the Atlantic, the Stoxx Europe 600 Index gained 0.8 per cent.
With a recent string of data clearly showing that unemployment remains high, home sales stay sluggish, and manufacturers are producing at a slow rate, investors are betting that the Federal Reserve may announce measures to help stimulate the world's largest economy later this week.
Fed Chairman Ben Bernanke is scheduled to speak on Friday at a Fed-sponsored conference in Wyoming attended by central bankers from around the world.
"I don't think anybody wants to be too short or negative in front of Bernanke's speech on Friday," Jim Awad, managing director at Zephyr Management in New York, told Reuters.
At the same time as investors' hopes for the Fed to act are rising, Dallas Fed President Richard Fisher told an American television interviewer that Bernanke is "not the tooth fairy".
"His job is not to leave presents under the pillow of people who have desires that may not be easily fulfilled," Fisher said, according to a partial transcript provided by Fox Business Network. "Our job is to put things right in the long term."
Among the reports released today was the Fed Bank of Richmond's business activity index, which fell to minus 10 in August, the weakest since June 2009.
The monthly survey of producers in the region covering the Carolinas, Maryland, Virginia and West Virginia corroborated factory reports from Philadelphia and New York that pointed to weakness in the industry. Also, the Commerce Department said sales of new US homes slid more than expected last month.
The latest US reports came as reports showed manufacturing activity was stalling in Europe and slowing in China too and the combined result is that it's getting more expensive to borrow money.
Fear about European bank funding was reflected in another jump in the cost of short-term interbank dollars. Meanwhile, the cost of US banks' debt also increased in the unsecured bond markets.
Three-month dollar Libor rates rose to their highest since February at 0.31178 per cent. The rate has been steadily increasing since late July, and eurodollar futures point to further rises, signalling increasing costs for euro zone banks to raise dollar funding.
A steady dive in the stock price for Bank of America in New York trading has raised the spectre that the US lender might have to raise capital at a time few investors are interested in providing it.
"I think what's driving this more than anything is that institutional investors want to hold onto cash as much as possible, they want to stay as liquid as possible," Abdullah Karatash, head of US fixed-income credit trading at Natixis in New York, told Reuters.
"There are definitely issues in funding affecting banks across the board," he said.