Stocks advanced amid hope that the Federal Reserve will provide a helping hand and that the talks about the Greek bailout will prove more productive than expected.
The market seemingly shrugged off a surprise downgrade of Italy's credit rating and the International Monetary Fund's bleak outlook.
In late trading in New York, the Dow Jones Industrial Average rose 0.96 per cent, the Standard & Poor's 500 Index gained 0.75 per cent and the Nasdaq Composite Index edged 0.17 per cent higher.
In Europe, the benchmark Stoxx 600 Index closed 1.8 per cent stronger.
The Fed, which began a two-day meeting today, is expected to announce tomorrow that it will start replacing short-term Treasuries with long-term bonds, according to the majority of economists surveyed by Bloomberg. The move is known as "Operation Twist," for its goal to reshape the yield curve.
"Treasuries have stayed near these levels because as an investor, you don't want to fight the Fed, especially when it's going to announce something," Larry Milstein, managing director of government and agency debt trading at R.W. Pressprich & Co., told Bloomberg News.
Still, analysts regard any potential support measures as modest.
"These are tinkering measures, not the financial bazooka, so to speak," Carl Riccadonna, senior US economist for Deutsche Bank in New York, told Reuters. "If we get to a period where the employment numbers turn negative - then I think there will be much more agreement on the Open Market Committee that they will have to do something bolder. We're certainly not there yet."
A report showing US housing starts declined more than expected in August underpinned the fact that the word's largest economy is struggling.
Across the pond, Italy's credit rating was unexpectedly slashed by Standard & Poor's by one notch as the credit ratings agency cited poor growth prospects and political instability. S&P cut Italy to A/A-1 from A+/A-1+ and kept its outlook negative.
The downgrade came amid fresh optimism that Greece will secure more funding in its talks with international lenders. At least based on what the Greek finance ministry is saying.
While Italian Prime Minister Silvio Berlusconi said the downgrade didn't reflect reality, investors and analysts were more concerned about struggles in Italy's economy, which is much larger than that of Greece.
"Italy is a much bigger deal than Greece," Kathy Lien, director of currency research at GFT in New York, told Reuters.
And the IMF warned the European Union needs to show more progressive action in dealing with its problems. The IMF also warned Europe and the US could slump back into recession.
"There is a wide perception that policymakers are one step behind the action, markets " IMF chief economist Olivier Blanchard told a news conference, according to Reuters. "Europe must get its act together."