"We saw market gains accelerate with the drop in oil prices and thanks to some encouraging economic numbers," said Peter Cardillo, chief market economist at Avalon Partners.
The market -- and media stocks in particular -- also received a lift from news that News Corp. launched a unsolicited bid for Dow Jones & Co., publisher of MarketWatch.
The Dow Jones Industrial Average finished up 73.23 points at 13,136, a new record closing high, as 26 of its 30 components advanced.
The gains were led by Hewlett-Packard Co. , Honeywell Co. , Home Depot Inc. , McDonald's Corp. and Walt Disney Co. .
Bucking the trend, shares of Procter & Gamble Co. dropped 2.2% after the personal care products maker narrowed its outlook range.
Also on the Dow, General Motors Corp. rose 0.2%, even after news that its U.S. sales plunged 9.5% in April. Alcoa Inc. , which supplies aluminum to the auto industry, dropped 2%.
Microsoft Corp. rose 1.5%. The software giant may offer somewhere "in the $1 billion range" for Internet advertising firm 24/7 Real Media , according to The New York Post.
The S&P 500 gained 4 points to 1,486, while the Nasdaq Composite added 6.4 points to 2,531.
Trading volumes showed 1.7 billion shares exchanging hands on the New York Stock Exchange and 2.4 billion trading on the Nasdaq stock market. Advancing issues outpaced decliners by 17 to 14 on the NYSE, while decliners still outpaced gainers by 15 to 14 on the Nasdaq stock market.
By sector, oil services , utilities and natural gas led the gains, while gold was amongst the few sectors falling.
In addition, media stocks jumped following news that News Corp. has launched a $60 per share bid for Dow Jones , publisher of this report. Shares of Dow Jones surged 58%.
Among media stocks, McClatchy Co. rose 2%, Gannett Co. Inc. gained 2%, and Tribune Co. finished flat.
The market came under pressure in morning trade following the release of key economic data. The Institute for Supply Management said its manufacturing index bounced back to 54.7% in April from 50.9% in March, following seven weak months. Economists expected the index to stay soft at 51%.
A sharp drop in the dollar might have helped manufacturers boost their exports, noted Jay Suskind, director of trading at Ryan Beck & Co. "That would be OK, but it throws a monkey wrench into the equation," he said.
But if a real turnaround happened, then inflation worries are likely to resurface, Suskind said.
At the same time, the National Association of Realtors said its index of pending home sales fell by 4.9% in March, indicating sales closed in April are likely to remain soft. The index is also down 10.5% from a year earlier and is at its lowest level in three years.
"The Fed is in a predicament, facing slowing growth versus inflation," said Ryan Beck & Co's Suskind. "Friday's jobs report is going to be very important."
While earnings have for the most part easily beat Wall Street expectations, which had been lowered sharply, investors are keen to decipher the economic trends for the rest of the year.
Economic reports, especially the April employment report on Friday, will receive particular attention ahead of next week's Federal Reserve meeting on interest rates.
Most economists expect the Fed, which has been on hold since last summer, to leave the key overnight unchanged at 5.25%. But there could be switches in stance in the policy communiquC).
"The focus is clearly shifting to the economy as the Fed gets set to meet next week," said Marc Pado, chief U.S. market strategist at Cantor Fitzgerald. "While no one is ooking for the Fed to move in either direction, the mix of inflation data and economic weakness is causing some investors to lock in April's profits."
April proved to be a difficult month for Ford Motor Co. as the struggling automaker posted on Tuesday a 13% decline in U.S. vehicle sales amid a slowing housing market, lofty gas prices and slumping consumer confidence.
The same was true for General Motors, which saw its sales endure a similar retreat that wasn't quite as bad as analysts had expected.
DaimlerChrysler unit Chrysler, which is in talks with potential suitors, was the only major automaker to post a sales gain.
On Monday, U.S. stocks closed lower, after investors consolidated some of the hefty gains posted in April, while weighing at a revealing not only tame inflation but also a weakening. The Dow finished with a 58 point loss, the S&P 500 fell 11.7 points and the Nasdaq Composite dropped 32 points.
There was little overnight market news, as most European markets, save London, were closed for May Day celebrations and there was scant data in Japan.
Stocks in Motion
Retailer Circuit City Stores Inc. dropped 5.3%. The company withdrew its fiscal first-half 2008 outlook and said its fourth-quarter loss from continuing operations will widen due to the timing of revenue recognition of Internet-oriented sales.
Citigroup later downgraded the stock to hold, warning that more bad news could be on the way.
Billionaire investor Carl Icahn continued his bid for a seat on Motorola Inc.'s board by sending an open letter to shareholders that is being published as a full-page advertisement, according to a media report Tuesday.
Pfizer Inc. won a Canadian appeals-court ruling. A lower court would have allowed Teva's Canadian unit Novopharm to launch a generic version of Pfizer's Celebrex pain reliever.
Treasurys fell back following the ISM report. The benchmark 10-year Treasury note finished down 5/32 at 99-27/32 with a yield of 4.618%.
The dollar turned around and showed strength against both the yen and the euro.
Crude-oil futures fell sharply, one day ahead of weekly data on supplies that's expected to show a modest build in crude stocks, but further declines in gasoline supplies. Also, Iran agreed Monday to join international talks on security in Iraq. Crude for June delivery dropped $1.31 at $64.40 a barrel.
Gold futures fell as the dollar advanced. Gold for June delivery declined $6.20 to close at $677.30 an ounce on the New York Mercantile Exchange.
By Nick Godt