Stocks posted a three-day gain Tuesday, but lost steam in the final hour of trading, after a report that the euro zone became divided over terms of Greece's second bailout.
The Dow Jones Industrial Average gained 146.83 points, or 1.33 percent, to finish at 11,190.69. Stocks were up almost 320 points in session highs.
Hewlett-Packard and Disney led the blue-chip gainers, while BofA declined.
The S&P 500 climbed 12.43 points, or 1.07 percent, to close at 1,175.38, while the Nasdaq rose 30.14 points, or 1.20 percent, to end at 2,546.83.
The CBOE Volatility Index, widely considered the best gauge of fear in the market, slipped below 38.
All 10 S&P sectors managed to finish higher, although significantly off their best levels earlier in the day.
The market rallied sharply throughout the day, rising almost 3 percent across the board in session highs, but quickly pared their gains following an FT report that said there is a split in the euro zone over Greece's default terms. As many as seven of the bloc’s 17 members are arguing for private creditors to swallow a bigger writedown on their Greek bond holdings, according to senior European officials.
In addition, the European Commission is expected to create a financial transaction tax, despite opposition from several member nations. The plan will be discussed in a speech before the European Parliament by José Manuel Barroso, the president of the commission, at 3am ET on Wednesday in Strasbourg, France.
“There’s a ‘game changer’ headline that changes the rule of trading every hour,” said Todd Schoenberger, managing director of LandColt Trading. “Investors need to proceed with caution—it’s a ‘buyer beware’ market at this point."
Others warned that volatility will continue to haunt investors.
“We’re not out of the woods and we’re not near a solution yet—the euro zone and U.S. debt problems are still not resolved,” said Brian Gendreau, market strategist of Cetera Financial Group. “Economists and market participants went from thinking we’re in a weak patch, to recognizing that we’re actually in an extended period of slow growth.”
European shares closed sharply higher across the board, led by banks. In Greece, the parliament approved an unpopular property tax lawthat is crucial to its austerity plan.
Meanwhile, the European Investment Bank said it had not been approached to take part in any bailout mechanism involving the euro zone's EFSF fund, denying previous reports.
Among banks, Meredith Whitney cut her third quarter estimates on Goldman Sachs to 31 cents from $3.39 and Morgan Stanley to 28 cents from 53 cents.
KBW earlier cut its price target on Goldman to $155 from $185 and Morgan Stanley to $24 from $28. And earlier, Goldman Sachs said it may raise its cost cuts through further layoffs and pay reductions, according to the NYT. Meanwhile, KBW cut its price target on the bank to $155 from $185.
On the tech front, Apple finished lower even after news the tech giant may unveil its latest iPhone next Tuesday. On Monday, JPMorgan said the iPhone maker is cutting orders from suppliers of parts for its iPad by 25 percent.
Research In Motion rallied following speculation that billionaire investor Carl Icahn may take a stake in the BlackBerry maker. And Motorola Solutions is being investigated by U.S. regulatory authorities on whether the company paid bribes to win business in Europe.
Boeing rose after the aircraft maker's CEO Jim McNerney said it expects to reach "cash breakeven" on each 787 Dreamliner this decade.
Meanwhile, Walgreen slumped after the drugstore chain said there had been limited progress in its contract renewal talks with Express Scripts . However, the company posted a sharply higher profit.
Oil prices surgedwith U.S. light, sweet crude soaring almost 5 percent, while London Brent crude jumped nearly 3 percent. Gold gained sharply to settle at $1,652 an ounce as a drop in the dollar index helped the precious metal's recovery from its worst three-day decline in nearly three decades from the session before.
Treasury prices remained steady at lower levelsafter the government auctioned $35 billion of two-year notes at a high yield of 0.249 percent and a bid-to-cover of 3.76. The government is also slated to auction 5- and 7-year notes on Wednesday and Thursday, respectively.
On the economic front, home prices gained for a fourth-consecutive monthin July amid the peak buying season, according to the Standard & Poor's/Case-Shiller home price index. However, the housing market continues to remain weak and prices are expected to fall in the months ahead.
Meanwhile, consumer confidence remained depressedin September, according to the Conference Board.
—Follow JeeYeon Park on Twitter: twitter.com/JeeYeonParkCNBC—
On Tap This Week:
WEDNESDAY: Weekly mortgage apps, durable goods orders, oil inventories, 5-yr note auction; Earnings from Darden Restaurants
THURSDAY: GDP, jobless claims, Fed's Rosengren speaks, corporate profits, pending home sales, 7-yr note auction, farm prices; Earnings from Micron
FRIDAY: Personal income & outlays, Chicago PMI, consumer sentiment, Fed's Bullard speaks
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