The surge gave the market its first two-day advance since Oct. 30-31 and the Dow's biggest two-day percentage gain since October 1987; the 891-point rise over the two sessions also wiped out an 872-point plunge over the course of Wednesday and Thursday. Although investors sensed late last week that a rescue of Citigroup was forthcoming, investors nonetheless were heartened, even emboldened, by the U.S. government's decision late Sunday to and guarantee $306 billion in risky assets.
Wall Street's enthusiasm grew not only because the bailout answered questions about Citigroup but also because many observers saw the move as offering as a model for how the government might carry out other bank stabilizations.
"This could be the template for saving the banks," said Scott Bleier, founder of market advisory service CreateCapital.com.
"The government has taken a new quill out, they've gone to where they didn't go before in terms of trying to secure the system," Bleier said. "Some of that vulnerability seems to be gone now."
Still, the market remains wary, especially with the economy in a serious downturn. The Dow was up more than 500 points in the last hour before giving up some of its gains - many investors wanted to take some money off the table before the next bit of bad news arrives. And the market has frequently done sharp reversals since the start of the credit crisis 15 months ago.
The government is injecting money into Citigroup with strings attached, reports CBS News correspondent Kelly Wallace.
The money will come in exchange for shares that will pay eight percent back to the taxpayer; Citigroup also agrees to place limits on executive pay and help homeowners facing foreclosure, reports Wallace. But some analysts say the bailout doesn't go far enough - and that the company will need much more from Uncle Sam.
"The $20 billion is about 10 percent of what Citicorp needs to get back to financial health," said Sean Egan of Egan-Jones Ratings Company. "They need about 200 billion, they got 20."
The efforts from the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp. to help stabilize Citigroup are only the latest this year to support a banking system troubled by bad debt and flagging confidence. Besides implementing its $700 billion bailout plan for the overall financial industry, the government has bailed out insurance giant American International Group Inc. and taken over lenders Fannie Mae and Freddie Mac.
"You're definitely seeing relief," said Anthony Conroy, managing director and head trader for BNY ConvergEx Group. "More than anything, the Fed repaired some of the psychological damage that was being done to the sector. I think the Fed is poised to do whatever they possibly can to help the financials get through the current turmoil."
"Not all banks are unhealthy, so knowing that the Fed is there is enough," Conroy said.
According to preliminary calculations, the Dow rose 396.97, or 4.93 percent, to 8,443.39.
Broader stock indicators also jumped. The Standard & Poor's 500 index advanced 51.78, or 6.47 percent, to 851.81, and the Nasdaq composite index rose 87.67, or 6.33 percent, to 1,472.02.
The Russell 2000 index of smaller companies rose 30.25, or 7.44 percent, to 436.79.
The rise in stocks follows a rally Friday that saw the Dow industrials jump 494 points, or 6.5 percent. The other major indexes also rose sharply. Still, stocks ended the week with a loss after heavy selling Wednesday and Thursday.
"I think it's a little bit of confidence coming back into the system right now," said Harry Clark, chief executive of Clark Capital Management. He contends the market began to form a bottom in an Oct. 10 sell-off and on Thursday made further headway toward setting a low that could give way to a rally.
Bond prices were mixed Monday as investors examined the government's bailout plan for Citigroup. The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 3.36 percent from 3.20 percent late Friday.
The Treasury bill market showed continuing high demand, a sign of investors' caution. The yield on the three-month T-bill, considered one of the safest investments, fell to 0.02 percent from 0.04 percent late Friday.
The dollar was mostly lower against other major currencies, while gold prices rose.
Light, sweet crude rose $4.61 to $54.54 on the New York Mercantile Exchange.
Jim Baird, chief investment strategist with Plante Moran Financial Advisors, said the uncertainty over whether the government's cocktail of direct investments in financial houses and support of debt obligations will prove effective has led to recent stock market volatility. He warned, however, that the concerns about banks and the broader economy are likely to continue, he said.
"Just the sheer breadth of potential outcomes is very, very wide which I think makes it difficult for investors to determine how do you play it from here."
Stocks briefly came off their highs of the session in the middle of the session, with the Dow paring its gain from 300 points to 200 points, as but didn't offer specifics of an economic stimulus package nor state that he would push back a plan to raise taxes on the richest Americans. He reiterated his goal of creating 2.5 million jobs during the next two years.
Alan Lancz, director at investment research group LanczGlobal, said that while the market might have wanted a firmer commitment against raising taxes, it was too soon for Obama to outline specifics. Lancz expects the new administration wouldn't rush to implement the hikes if the economy appeared too weak.
"There's so many balls in the air right now he'd be foolish to make specific comments," Lancz said, noting that the economic picture could change greatly by Inauguration Day, which is Jan. 20.
Wall Street shrugged off a larger-than-expected drop in sales of existing homes last month as investors instead focus on the government's plans for the financial sector. And while the housing numbers fell short of expectations, Wall Street expected sales would fall sharply after last month's upheaval in the financial markets.
The National Association of Realtors says sales of existing homes fell 3.1 percent to a seasonally adjusted annual rate of 4.98 million in October. That's down from 5.14 million in September.
Citicorp's stock shot up nearly 60 percent Monday to just under $6 but the stock market rally might be short-lived -- shares of other major U.S. banks like Bank of America and JPMorgan Chase have lost more than 50 percent this year, reports Wallace.
Advancing issues outnumbered decliners by about 7 to 1 on the New York Stock Exchange, where volume came to 2.04 billion shares.
Overseas, Britain's FTSE 100 jumped 9.84 percent, Germany's DAX index surged 10.34 percent, and France's CAC-40 rose 10.09 percent. Hong Kong's Hang Seng index fell 1.59 percent; markets in Japan were closed for a holiday.