Stocks closed with solid gains, led by technology companies such as Apple, as investors bet that a sharp drop in crude oil prices will help shore up consumer and business spending on tech gear.
A 2.6 percent drop in oil prices was a welcome development after oil prices hit a record above $135 barrel last week, fanning worries about the outlook for corporate profits and a slowdown in consumer spending.
Shares of consumer-oriented companies, including retailers, gained along with technology shares, even as energy companies, including Exxon Mobil , declined in sync with oil prices.
Shares of Apple , the maker of the iPhone and the iPod, jumped 2 percent, while Google , the leading Internet search company, gained almost 3 percent.
They were the Nasdaq's top two advancers.
International Business Machines led the Dow's gainers.
"Oil being down helps because people lately seem to be thinking of technology as discretionary," said Peter Jankovskis, director of research, at OakBrook Investments in Lisle, Illinois. "I really think what we're doing is building a very solid base for a strong rally to end the year."
Home builders were also among standouts following a report that showed a surprise increase in April new-home sales. The Dow Jones home construction index rose 1.85 percent.
Shares of luxury home builder Toll Brothers gained.
Airline stocks also headed higher on lower crude oil prices, with the airline index up almost 4 percent.
Also on Tuesday the Commerce Department reported that new-home sales rose in April, marking the the first increase since October, although the gain came after a big downward revision to the prior month. In addition, sales were down 42 percent from a year ago.
Other data showed prices of U.S. single-family homes fell a record 14.1 percent in the first quarter from a year earlier. The Dow Jones Industrial Average rose 68.72 points, or 0.55 percent, to 12,548.35.
Home Depot , the world's biggest home improvement retailer, was the second-biggest percentage gainer on the Dow.
But concerns about the consumer remained. A report showed U.S. consumer confidence plunged unexpectedly to its lowest in 16 years in May as rising gasoline costs and falling home prices made Americans nervous about the future.
In corporate news, talks on a merger between Belgian brewer InBev, the world's second-biggest by volume, and Anheuser Busch, maker global top-selling beer Budweiser, could start as early as Tuesday, according to a published report.
Bank of America forecast a second-quarter loss for Lehman Brothers and cut its earnings outlook for Morgan Stanley and Goldman Sachs, and said brokers may continue to underperform in the current challenging credit environment.
Asian markets rebounded as bargain hunters scooped up shares after five days of losses, while in Europe banks again dragged the major indexes down.
Analysts said a merger, which press reports put at around $50 billion, would help the U.S. company cut costs and have more bargaining muscle with suppliers, while the Belgian brewer would see its dream of gaining market share in the U.S. come true.
Executives' pay came into the limelight again as Alcatel-Lucent, which posted a first-quarter net loss and warned on 2008 sales, will ask shareholders to vote on a proposal to tie its CEO's 6 million euro ($9.45 million) golden parachute to performance objectives, according to a report in London Newspaper the Times.