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Stocks Close Higher; Yahoo Tumbles

It was swing your partner, round and round, on Wall Street today.

Merger news dominated the market, with stocks rallying for most of the day, in part due to enthusiasm for merger buzz in the beverage industry. But an afternoon shocker that Microsoft has walked away from a deal with Yahoo-- seriously, this time it's for real, -- maybe -- shut it down.

And, do-si-do.

Also throwing right-hand left into the rally was oil's resurgence. Oil prices initially fell more than $3 a barrel but rallied in the afternoon, ending up near $137.

All three major indexes regained their composure by the closing bell, promenading to the finish line with modest gains. The Dow Jones Industrial Average closed up 0.5 percent, while the S&P 500 index gained 0.3 percent and the Nasdaq added 0.4 percent.

Yahoo stock dropped 10 percent as news of the scrapped deal hit; Microsoft shares rose 4.1 percent. The decision apparently came after Microsoft learned that Yahoo was close to a search advertising deal with Microsoft arch-rival Google .

Shares of brewer Anheuser-Busch jumped 5.2 percent following news that the maker of Bud Light and Michelob beers had received an unsolicited $46.3 billion takeover bid from Belgian rival InBev.

If it goes through, the deal would be the biggest takeover in the beer industry ever. However, analysts say InBev, which makes Stella Artois and Beck's beers, will probably raise the price from the initial $65 a share it was offering for Anheuser-Busch.

This is the second big M&A announcement this week: Staples on Tuesday confirmed its plans to buy Dutch office supplier Corporate Expressfor $2.6 billion.

Shares of big manufacturers advanced, with Caterpillar up 2 percent and plane maker Boeing up 1.1 percent.

Financials -- excluding Lehman Brothers -- were the top gainer among 10 key S&P sector indexes, rising 1.5 percent.

Lehman Brothers shares started the day at a six-year low, then after a wild day of swings, shaved another 4.4 percent off of that, following news that CFO Erin Callan and operating chief Joseph Gregory were ousted from their high-level positions at the struggling brokerage firm.

JPMorgan Chase shot up 2.4 percent, while Citigroup jumped 3.5 percent.

The recovery for banks is still a long way off, despite their efforts to raise capital, Meredith Whitney, executive direct of equity research at Oppenheimer & Co, said. Whitney said all bank dividends are at risk.

Like an instant prophecy, KeyCorp cut its dividend in half and said it plans to raise $1.5 billion in fresh capital. Its shares plunged 24 percent.

In a sign the tide may be turning, however, Morgan Stanley upgraded its rating on financial stocks and downgraded its rating on the energy sector.

Shareholders of American International Group are asking for changes to the management and board of the world's largest insurer, which has been struggling with the fallout of the subprime mortgage mess.

Standouts also included technology shares, with wireless chip maker Qualcomm up 5.8 percent after raising its quarterly profit outlook.

A government report showed retail sales rose 1 percent -- twice the gain expected -- in May, boosted by the government-rebate checks. Excluding gasoline, sales still rose by a robust 0.8 percent. Excluding autos, sales rose 1.2 percent, the biggest rise in six months.

Among retailers, Wal-Mart Stores shares shot up nearly 2 percent, while Costco shares skidded 1.2 percent.

The market started Thursday's session at its most oversold condition since early March, according to the 14-day relative strength index of the S&P 500 index.

Still to Come:

FRIDAY: CPI, consumer sentiment

Send comments to cindy.perman@nbcuni.com.