Stocks logged their biggest three-day rally since Mar. 2009, fueled by a handful of M&A news and as investors shrugged off some disappointing economic reports.
In addition, the major indexes wiped out all of last week's losses following S&P's downgrade of U.S.'s credit rating.
The Dow Jones Industrial Average soared 213.88 points, or 1.90 percent, to finish at 11,482.90, led by BofA and Chevron .
The S&P 500 surged 25.68 points, or 2.18 percent, to end at 1,204.49. The Nasdaq jumped 47.22 points, or 1.88 percent, close at 2,555.20.
The CBOE Volatility Index, widely considered the best gauge of fear in the market, tumbled more than 10 percent to trade near 31.
Despite the robust gains in the last three sessions, all three major indexes are still significantly lower for August and are on track for its worst month since May 2010.
All 10 S&P sectors closed higher, led by utilities, energy and financials.
“Everyone’s sitting on their hands and waiting for the Merkel/Sarkozy meeting tomorrow and they might have their hopes too high [as] they’re hoping something can be worked out,” Art Cashin, director of floor operations at UBS Financial Services told CNBC.
German Chancellor Angela Merkel and French President Nicolas Sarkozy are scheduled to meet on Tuesday, where they are expected to discuss the ongoing euro zone debt crisis.
“What we’re seeing right now is a rebound, but if you go back to the ‘87 crash, we rebounded 6 percent the next day and 10 percent the day after that, but by December, we were headed back for another low,” warned Cashin. “So you want to be very careful.”
Wall Street cheered a flurry of M&A activity. Motorola Mobility surged after Google said it will acquire the wireless phone maker for about $12.5 billion in cash, a move to bolster the Android mobile phone software.
Research In Motion and Nokia jumped as both companies emerged as potential winners following the Google/Motorola news. Meanwhile, analysts project the merger will not have a big impact on rival Apple .
Meanwhile, Bank of America gained after the company said it plans to exit the credit card business in Canada and Europe.
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And Transocean launched a $1.43 billion bidfor Norway's Aker Drilling.
Oil prices climbed, with U.S. light, sweet crude gaining $2.50 to settle at $87.88 a barrel, and London Brent crude up $1.88 to settle at $109.91. Oil giants led the market higher, thanks to gains from the likes of ExxonMobil and Chevron .
On the earnings front, Lowe's reported weaker-than-expected salesas homeowners delayed big renovations amid an anemic U.S. economy. At least two brokerages cut their price targets on the firm. Meanwhile, rival Home Depot is slated to post earnings ahead of the bell Tuesday, in addition to Wal-Mart .
Volume declined from their record highs of last week with the consolidated tape of the NYSE at 4.21 billion shares, while 1.1 billion shares changed hands on the floor.
While the day's economic news was disappointing, investors seemed to shrug off the bad news. The New York Empire State manufacturing index fell to their lowest level since Nov. 2010, according to the New York Federal Reserve.
And homebuilder sentiment remained stuck at historic lowsin August, according to the National Association of Home Builders.
Despite the disappointing report, homebuilders were up sharply across the board including Lennar , Beazer and Pulte Homes , all jumped.
More news on the housing market is expected throughout the week with housing starts on Tuesday, weekly mortgage applications on Wednesday and existing home sales on Thursday.
In Europe, the ECB bought 22 billion euros ($31 billion) of government debt last week, reactivating its bond-buy plan to try to halt the spread of the euro zone debt crisis to Spain and Italy.
—Follow JeeYeon Park on Twitter: twitter.com/JeeYeonParkCNBC—
Coming Up This Week:
TUESDAY: Housing starts, import/export prices, industrial production, Sarkozy & Merkel meet; Earnings from Home Depot, Wal-Mart, Saks, TJX and Dell
WEDNESDAY: Weekly mortgage apps, PPI, oil inventories; Earnings from Deere and Target
THURSDAY: CPI, jobless claims, existing home sales, Philadelphia Fed survey, leading indicators, money supply, Forest Labs shareholder mtg; Earnings from Sears, Hewlett-Packard and Gap
FRIDAY: Fed's Pianalto speaks, Google IPO anniversary
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