The Dow piled on the points ahead of the Thanksgiving holiday, adding more than 1,000 points in a four-session winning streak.
"Sentiment is changing a little bit," said Nadav Baum, managing director of investments at BPU Investment Management in Pittsburgh. "I think the panic is subsiding and people are starting to look at stocks again — and credit markets — based on fundamentals and that's a good thing."
"We may be able to have a Santa Claus rally," Baum said.
The Dow Jones Industrial Average gained another 250 points, or 2.9 percent, bringing its four-day total to nearly 1,200 — it's biggest four-day point gain ever and best four-day percentage gain since 1932.
The S&P 500 index rose 3.5 percent, and the beaten-down Nasdaqrebounded 4.6 percent.
U.S. financial markets are closed Thursday for the Thanksgiving holiday and will close at 1 p.m. ET on Friday.
Stocks briefly turned lower this afternoon following news thatseven attacks ripped across Mumbai, India's financial capital, killing at least 80 people and injuring more than 250.
But optimism following several developments today prevailed: President-elect Barack Obama named another economic adviser, an auto bailout looked more certain and mortgage rates declined.
In his third news conference in as many days, Obama named former Fed Chairman Paul Volcker to chair an economic advisory panelto help stabilize financial markets and avert a recession.
Shares of General Motors and Ford jumped 35 percent and 30 percent, respectively, after Deutsche Bank said chances have improved for an auto bailout.
Beaten-down big-name techs ralliedbut Oracle shares trailed with a modest 1-percent gain amid worries that the software maker could miss its quarterly-sales target as the U.S. slowdown clips technology spending and the strong dollar curbs sales outside the U.S.
Research In Motion , Apple and Dell all gained more than 4 percent.
Citigroup shares jumped 16 percent, ending at $7.05, an impressive rally considering the stock ended below $4 on Friday. The bank gained another high-profile investor last week as Inbursa, the investment firm controlled by Mexican billionaire Carlos Slim, bought roughly 26 million shares of the bank, sources told CNBC.
Overall, financials were among the day's biggest gainers, climbing 5 percent.
But a well-known analyst said U.S. banks will likely take another $44 billion in write-downs in the fourth quarter.
In a research report titled "Gobble Gobble," Oppenheimer analyst Meredith Whitney money pumped into the sector from the Troubled Asset Relief Program (TARP) won't spur meaningful growth in the industry as much of the capital raised will be offset by these write-downs.
Investors also shrugged off some dismal economic reports:
Consumer sentiment fell to a 28-year low in November as mounting job losses, falling incomes and declining household wealth battered sentiment, a Reuters/University of Michigan survey showed.
And they spent less, with consumer spending down 1 percent in October, the sharpest drop in seven years, even as income rose 0.3 percent.
No more was that more evident than in spending on big-ticket items such as cars and appliances: Durable-goods orders tumbled 6.2 percentlast month, more than double of what economists had expected. Excluding the volatile transportation component, orders were were nearly three times worse, falling 1.5 percent when economists had expected a 4.4-percent drop.
Midwest manufacturing activity contracted more than expected in November, the Chicago Purchasing Managers' Index showed.
Meanwhile, it wasn't much better on the employment front: Jobless claims dropped more than expected last week, falling 14,000 to 529,000.
New-home sales dropped 5.3 percent to a 433,000 annual rate in October, an 18-year low as prices fell to 2004 levels.
One bright spot was mortgage applications, which rose 1.5 percent last week as a drop in mortgage rates boosted demand.
Today's earnings reports proved equally gloomy:
Tractor maker Deere reported its earnings declined and lowered its 2009 forecast.
Upscale jeweler Tiffany also reported its profit fell and slashed its full-year forecast, saying it plans to cut costs and pare down its staff.
Not only is the holiday season expected to challenging for retail stores but also online stores. E-commerce sales are expected to be flat in November and December, compared with a year earlier.
Amazon is expected to fare better than its rivals, logging 12 to 15 percent growth, but still, the world's largest online retailer isn't taking any chances, rolling out a series of holiday promotions focused on low prices. Its shares rose 4.2 percent.
>> Check in on how the holiday season is shaping up at CNBC's Holiday Central.
Send comments to firstname.lastname@example.org.