"Clearly there is a recognition the credit markets are healing -- usually stocks begin to rally about six months before the end of a slowdown," said Jeffrey Kleintop, chief market strategist at LPL Financial Services.
"And with earning season less than a week away, and we haven't heard a flood of negative pre-announcements," Kleintop said.
The Dow industrials climbed 391.47 points, or 3.2%, to 12,654.36, with all 30 components ending higher, with shares of Citigroup Inc. leading the way, up 11.3%.
The stock indexes solidified gains in the wake of U.S. economic data that showed the Institute for Supply Management's index inching up to 48.6% in March from 48.3% in February, topping the forecasts of analysts looking for it to slip to 47%. .
"Healthy demand abroad has boosted exports of manufactured goods, offsetting some of the strain from weak domestic demand," said Michelle Meyer, a Lehman Brothers economist.
The early economic data fostered the sentiment that says, "'Hey, we're not falling through the floor on economic data,'" said Bill Stone, chief investment strategist at PNC Wealth Management. "You'll probably continue to see weak economic data, but that doesn't necessarily doom you to poor stock-market returns."
Separately, the Commerce Department reported U.S. construction spending fell 0.3% in February, less than the 1% drop predicted by economists.
The S&P 500 Index added 47.48 points, or 3.6%, to 1,370.18, while the Nasdaq Composite Index advanced 83.65 points, or 3.7%, to 2,362.75.
The broad-based rally lifted nearly all sectors, with the Amex Securities Broker/Dealer index among those tallying the largest gains, along with the S&P Bank Index .
The Philadelphia Gold Silver Index was on the short list of decliners.
Volume on the New York Stock Exchange topped 4.7 billion shares, with six stocks gaining for every issue on the decline. On the Nasdaq, 2.1 billion shares were exchanged, and advancers topped decliners 3 to 1.
On the New York Mercantile Exchange, crude futures fell 60 cents to $100.98 a barrel, while gold futures dropped below $900 an ounce, $33.70 to close at $987.80 an ounce. .
The dollar index, which measures the greenback against a basket of currencies, was at 72.55, up from 71.749 late Monday. .
A big positive behind the impressive gains on Wall Street is the favorable reception to Lehman's offering. "It's three times oversubscribed; people are interested in investing in Lehman," said Art Hogan, chief market strategist at Jefferies & Co.
"Investment banks are losing money and need to raise money in the capital markets, and fortunately they are doing it," said Hugh Johnson, chairman of Johnson Illington Advisors.
Shares of Lehman added 17.8% after the company announced plans to offer $4 billion in convertible preferred shares.
"The thought being if you can raise the capital and take care of things, it takes off the table the collapse worries," said Stone.
UBS shares gained 14.6% after the company disclosed $19 billion in new write-downs and said that it would issue another $15 billion in shares.
Germany's Deutsche Bank AG reported a $3.9 billion write-off, mostly on leveraged loans, commercial real estate and alt-A exposures.
"It's not just a U.S. problem; it's the European banks' turn to say, 'Yeah, we had a little exposure there too,'" said Hogan, who also pointed to an index showing confidence among Japanese manufacturers at a four-year low as a way of putting U.S. economic woes in perspective.
Overseas, European shares started off the second quarter strongly, largely on gains from financials including UB. .
In Asia, stocks closed mixed, with Nikon Corp. leading advances in Japanese technology stocks. .
U.S. stocks on Monday finished the worst quarter in roughly five years with a solid advance.
By Kate Gibson