Stocks bobbed higher as oil prices dropped. Banks led the way amid relief over Lehman Brothers quarterly results.
The Dow Jones Industrial Average struggled to keep up, dragged down by several blue chips include Verizon and AT&T after an analyst downgrade.
Oil jumped to a new record above $139 a barrel, before dropping below Friday's close. News broke over the weekend that Saudi Arabia plans to increase output but a source close to the Saudi oil industry told CNBC.com that the 500,000-barrel-a-day goal may not be achievable.
The New York Fed reported its Empire State manufacturing index fell to minus 8.68from minus 3.23 in May. It was the fourth contraction in the index in the past five months and was more severe than the minus-2 reading expected.
The market was buzzing about an article in the Washington Post this morning that said Federal Reserve Chairman Ben Bernanke doesn't plan to begin raising rates anytime soon.
"Speculation that the Federal Reserve is about to begin inflation-fighting interest rate increases appears to be dead wrong," Post columnist Robert Novak wrote, citing unnamed sources close to Bernanke.
Talk of the Fed beginning a tightening cycle has escalated since ECB chief Jean-Claude Trichet said a few weeks ago that the European central bank will soon begin raising rates to stifle inflation.
Morgan Stanley said the ECB will likely begin raising its rates in the next few months, something that, if the limited history in this area is any guide, could give European stocks a boost.
Blue chips lagged the broader market upturn as the Dow was dragged down by Verizon, AT&T and General Electric.
CNBC parent General Electricsaw its shares fall 2 percent before flattening out after JP Morgan Securities downgraded the company from "overweight" to "neutral" and cut its earnings forecast.
Telecoms declined after UBS cut its rating on both AT&T and Verizon to "neutral" from "buy."
Financials recovered from an early slide, with the S&P financial index up more than 1 percent.
Citigroup , Bank of America and JPMorgan were among the top five gainers on the Dow.