Stocks racked up hefty gains in both the US and Europe as investors swept into the market after days of sharp declines. The trigger was speculation that the Federal Reserve may impose another interest rate cut to shore up the economy.
"We are getting some talk of further rate cuts by the Fed and that is certainly helping the market," said Mr Owen Fitzpatrick, head of the US equity group at Deutsche Bank Private Banking. "People are hoping additional rate cuts are going to help the economy and save us from going into another recession."
Lehman Brothers became the latest Wall Street investment bank to say it expected the Fed to cut rates, currently at 40-year lows, before the end of the year.
Bargain hunters also helped spur stocks as they scooped up technology names following four sessions of declines. The Nasdaq composite index closed at five-year lows on Monday.
Interest rate cuts "make money cheaper to borrow and stimulate economic growth", said Mr David Memmott, head of listed block trading for Morgan Stanley. He added that recent declines were another catalyst. "We've seen the Dow drop 2 per cent or more for three days," he said. "We're due for a bounce."
Stock indices racked up their biggest percentage gains since a monster rally last week pushed the blue-chip Dow Jones Industrial Average to its third-largest point gain ever.
The Dow Jones Industrial Average was up 230.46 points, or 2.87 per cent, at 8,274.09, The broader Standard & Poor's (S&P) 500 Index closed up 3 per cent, at 8596. The Dow and the S&P had dropped for the past three sessions.
The tech-laden Nasdaq Composite Index was up 53.54 points, or 4.43 per cent, at 1,259.45. On Monday, the index racked up its lowest close since April 1997.
Winners outpaced losers by a ratio of about three to one on the New York Stock Exchange and 12 to five on Nasdaq. More than 1.5 billion shares changed hands on both the Big Board and Nasdaq.
Some market watchers were sceptical of the surge, however, recalling a string of fleeting rallies throughout the bear market. Stocks rallied at the end of July, spurring hopes the market had scraped bottom. But that run-up was followed by a string of steep selloffs.
"I guess everybody is afraid of missing out on a rally," said Mr Ted Oberhaus, manager of equity trading at Lord Abbett & Co, which oversees $43 billion (€44.6 billion) in client funds. "But keep in mind this is a bear-market rally. This is not something you want to chase."
Wall Street's strong performance revived the fortunes of European stock markets, which opened poorly on the back of Monday's sharp losses in the US.
"The whole of Europe is like a puppy dog, prancing around in the morning and waiting for its master to tell it what to do," one Dublin dealer said of the extent to which Wall Street was setting the pace.
Like other European markets, the Irish market slavishly followed the US trend, reversing most of the morning's 1.5 per cent fall to close 1.3 per cent higher.
Ryanair proved the main talking point as the low-cost airline delivered higher-than-expected 68 per cent growth in after-tax profits and the shares gained 1.6 per cent.
In London, the FTSE 100 rebounded from morning losses of more than 2 per cent to close 3.4 per cent higher. Meanwhile, German shares erased Monday's 6 per cent fall, closing 6.7 per cent higher, while in Paris, stocks gained 5.4 per cent. (Additional reporting by Reuters)
