The merger, the largest such transaction involving U.S. retailers, strong data on industrial production and a jump in housing construction overshadowed a worrisome reading of the Consumer Price Index, the government's most closely watched inflation barometer. The latest inflation data followed a sharp 1.7 percent increase in the Producer Price Index, which sent stocks falling yesterday.

"This is a terrific rebound, and startling in the face of the twin jumps in inflation that we've had over the last couple of days. The market is definitely saying that inflation is not the problem right now, it's still a question of growth," said Ken Tower, chief market strategist for Schwab's CyberTrader. "Mergers are bullish in general, because they show business confidence ... I think the merger just backs up the economic stuff. It's part of the same growth-in-the-economy theme."

According to preliminary results, the Dow Jones industrial average was up 61.92, or 0.59 percent, at 10,549.57, after surging more than 100 points earlier in the day.

The broader gauges were also higher, though they too lost some of their earlier momentum. The Standard & Poor's 500 index rose 6.51, or 0.55 percent, to 1,181.94. The Nasdaq composite index was up 21.06, or 1.01 percent, at 2,099.68.

Rising costs for energy and food sent the Consumer Price Index up 0.6 percent in October, the biggest advance in five months. Analysts said the Labor Department's latest snapshot of the inflation climate makes it more likely that the Federal Reserve will raise interest rates when policy makers meet Dec. 14.

Excluding volatile energy and food prices, "core" inflation increased by a more modest 0.2 percent in October. Both readings were higher than economists had forecast.

Separately, industrial production shot up 0.7 percent, a reading that suggests the sector is gaining momentum. Home builders showed strength after the Commerce Department reported a 6.4 percent jump in housing construction last month.

"It's quite obvious that the merger itself is good news, and of course the fact that we had industrial production taking off has helped strengthen the market," said Peter Cardillo, chief strategist with S.W. Bach & Co.

Oil futures were trading higher after the U.S. government reported a rise in oil supplies for the eighth straight week

Kmart soared $7.78, or 7.7 percent, to $109.00, on its plan to merge with Sears. Sears stock skyrocketed, rising $7.79, or 17 percent, to $52.99.