Microsoft said it will buy Nokia's handset business for $7.2 billion. Nokia CEO Stephen Elop, a former Microsoft executive, will rejoin the company and is now seen by some as a candidate to replace retiring CEO Steve Ballmer. Shares of Microsoft dropped to lead the Dow laggards, while Nokia skyrocketed more than 30 percent.
Meanwhile, Time Warner Cable and CBS reached an agreement Monday, ending a month-long blackout, returning the broadcast network's programming to millions of subscribers in Los Angeles, New York and Dallas. CBS rallied nearly 5 percent.
(Read more: Who really won the CBS-Time Warner Cable standoff)
On the economic front, the manufacturing sector grew last month to 55.7 in August, its fastest pace in more than two years, according to the Institute for Supply Management. A reading above 50 indicates expansion in the sector.
And construction spending gained 0.6 percent to an annual rate of $901 billion, according to the Commerce Department, topping expectations for a gain of 0.3 percent.
The Labor Department is expected to release its widely-watched employment report on Friday, ahead of the Fed's September policy-setting meeting. Economists polled by Reuters expect non-farm payrolls to have increased by 180,000 obs last month, up from a gain of 162,000 the month prior.
The Japanese Nikkei led Asian stocks higher, after better-than-expected manufacturing data from Europe and China lifted hopes that a global economic recovery was in progress.
Data out on Monday showed Chinese manufacturing hit a four-month high in August and euro zone factory activity rose at its fastest pace since May 2011. In addition, data revealed that the UK's construction sector expanded at its fastest pace in almost six years in August.
