"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.
The Dow industrials were recently up 378.77 points, or 3.1%, to 12,641.66, with all 30 components posting gains. Shares of Citigroup Inc. led the way, up 9.6%.
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.
"It looks like a financial-led rally, some of it based on Lehman raising capital -- the thought being if you can raise the capital and take care of things, it takes off the table the collapse worries," said Bill Stone, chief investment strategist at PNC Wealth Management.
The early economic data fostered the sentiment that says "Hey, we're not falling through the floor on economic data," he commented. "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 41.38 points, or 3.2%, to 1,364.08, while the Nasdaq Composite Index advanced 73.36 points, or 3.2%, to 2,352.46.
The broad-based rally lifted nearly all sectors, with the Amex Securities Broker/Dealer index among those tallying the largest gains, recently up 6.2%, and the S&P Bank Index gaining 5.9%.
The Philadelphia Gold Silver Index was on the short list of decliners, recently off 2.1%.
Volume on the New York Stock Exchange topped 3.5 billion shares, with five stocks gaining for every issue on the decline. On the Nasdaq, 1.6 billion shares were exchanged, and advancers topped decliners more than 2 to 1.
On the New York Mercantile Exchange, crude futures fell, recently off 39 cents to $101.19 a barrel, while gold futures dropped below $900 an ounce, recently off 90 cents at $882.00 an ounce. .
Gains in the dollar helped undercut commodities prices. The dollar index, which measures the greenback against a basket of currencies, was at 72.55, 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.
Shares of Lehman added 14% after the company announced plans to offer $4 billion in convertible preferred shares.
UBS shares gained 13.9% 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 UBS. .
In Asia, stocks closed mixed, with Nikon Corp. leading advancs in Japanese technology stocks. .
U.S. stocks on Monday finished the worst quarter in roughly five years with a solid advance.
By Kate Gibson