Rallying more than 100 points early on, the Dow Jones Industrial Average added to its 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.
The reading topped the forecasts of analysts polled by MarketWatch, who had expected the index to slip to 47.0%. .
Separately, the Commerce Department reported U.S. construction spending fell 0.3% in February, less than the 1% drop predicted by economists.
The Dow industrials were recently up 265.03 points to stand at 12,527.92, with all but one of its 30 components posting gains. Shares of Citigroup Inc. led the way, up 9.2%.
The S&P 500 added 21.88 points to 1,344.58, while the Nasdaq Composite advanced 42.12 points to 2,321.22.
Chevron Corp. proved to be the sole blue-chip member on the slide, its stock trading virtually flat.
Volume on the New York Stock Exchange hit 1.2 billion shares, with four stocks gaining for every issue on the decline. On the Nasdaq, 552 million shares were exchanged, and advancers topped decliners 3 to 1.
On the New York Mercantile Exchange, crude-oil futures fell $1.09 to $100.48 a barrel, while gold futures dropped below $900 an ounce, recently trading off $39.20 to $877 an ounce. .
Gains in the dollar helped undercut commodities prices. The dollar index, which measures the greenback against a basket of currencies, was at 72.64, up from 71.749 late Monday.
A big positive 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.
Shares of Lehman added 10% after it announced plans to offer $4 billion in convertible preferred shares.
UBS saw its shares gain 11.5% after it disclosed $19 billion in new write-downs and said it would issue another $15 billion in shares.
Germany's Deutsche Bank 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 putting U.S. economic woes in perspective.
Later Tuesday, U.S. automakers are due to report their monthly sales figures, with Edmunds.com seeing a 13% drop in March sales. Chrysler, owned by Cerberus Capital Management and Daimler, is expected to post the worst figures of the Big Three.
Overseas, European shares started off the second quarter strongly, largely on gains from financials including UBS. .
U.S. stocks on Monday finished the worst quarter in nearly five years with a solid advance.
By Kate Gibson