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.
Lehman Brothers shares advanced after swinging between positive and negative territory in pre-market trading as traders digested the investment bank's earnings report.
(Will Lehman follow in Bear's footsteps? Former Lehman CFO Brad Hintz weighs in. Click on the video at left.)
Lehman delivered aloss of $5.14 a share, or $2.77 billion, exactly what it had pre-announced last week. It was the firm's first-ever loss since being spun off from American Express in 1994. Traders initially breathed a sigh of relief that the results were as expected, bidding the stock up in pre-market trading. But shares began to falter as traders dug into the details, discovering some unexpected details, including the fact that the value of gross assets plunged by $147 billion during the quarter, more than the firm had estimated last week.
Still, the overall impression seems to be positive.
"The market was really focused on what Lehman would deliver. They were spot-on in the estimates and their numbers," Peter Kenny, managing director at Knight Equity Markets in Jersey City, N.J., said.
In a conference call following the earnings report, CEO Richard Fuld said the firm didn't react quickly enough to the deteriorating market and that the $2.8 billion loss "is my responsibility." He added, "our core business and our strategy are sound" and "we have a track record of taking market share coming out of difficult cycles."
Goldman Sachs and Morgan Stanley are slated to report earnings later this week; shares of both firms rose.
The latest corner-office casualty is AIG CEO Martin Sullivan, who was ousted as the firm's losses mounted and board and shareholder discontent mounted. AIG has named Chairman Robert Willumstad, a former top Citigroup executive, as his successor. Shares wobbled.
In the tech sector, chips were up about 1.5 percent, with Broadcom one of the top gainers on the Nasdaq 100, after the International Trade Commission ruled in Broadcom's favor in a patent dispute with SiRF Technology.
Also at the top of the Nasdaq leader board is BlackBerry maker Research In Motion , which has gained favor as investors sell off Apple after months of iPhone-fueled gains and amid concerns about Steve Jobs's health.
Shares of both Sirius and XM Satellite Radio shot up after FCC Chairman Kevin Martin confirmed reports that he would support the 16-month-old deal.
"I am recommending that with the voluntary commitments they've offered, on balance, this transaction would be in the public interest," Martin said in a statement.
MONDAY: NAHB housing index; Fed's Bernanke, Lacker speak; earnings from Adobe
TUESDAY: PPI; housing starts; current account; industrial production; earnings from Best Buy, Goldman Sachs
WEDNESDAY: MBA mortgage applications survey; oil inventories; Fed's Yellen speaks; Morgan Stanley, FedEx earnings
THURSDAY: Jobless claims; Philly Fed survey; leading indicators; natural gas inventories; Fed advisory panel meets to discuss credit-card regulation
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