Investors were heartened by the Commerce Department's report that consumer prices rose just 0.1 percent in October, far better than September's 0.9 percent jump. With incomes rising 0.4 percent and spending rising 0.2 percent, the market felt consumers could be well positioned for a strong holiday shopping season, while lower prices could bring an end to the Federal Reserve's interest rate hikes.

The news was enough to overcome some mixed retail sales reports. It also brought newfound confidence to investors, who piled into small-cap, riskier stocks as enthusiasm over a stop to interest rate increases grew.

"Investors have their rally caps on for year end, and we're doing it with speculation," said Jack Ablin, chief investment officer at Harris Private Bank. "With a good inflation report and strong growth, it seems to be the perfect elixir for Wall Street."

According to preliminary calculations, the Dow rose 106.70, or 0.99 percent, to 10,912.57. The move higher nearly reversed the market's previous three days of losses.

Broader stock indicators also rose sharply. The Standard & Poor's 500 index added 15.19, or 1.22 percent, to 1,264.67, and the Nasdaq composite index surged 34.35, or 1.54 percent, to 2,267.17.

Bond prices edged lower, continuing the three past sessions of selling, with the yield on the 10-year Treasury note rising to 4.52 percent from 4.49 percent late today. The dollar was higher against other major currencies, while gold prices rose above $500 per ounce to new 18-year highs.

Crude oil prices were volatile, with a barrel of light crude oil settling at $58.47, up $1.15, on the New York Mercantile Exchange.

An improvement in the labor picture ahead of tomorrow's monthly job creation report also lent support to stocks. First-time jobless claims fell to 320,000 last week, down from 335,000 the week before, the Labor Department said.

The day's other economic indicators were mixed. The manufacturing sector grew at a slower pace in November than in October, according to data from the Institute of Supply Management. Construction spending for October exceeded expectations, the Commerce Department said.

But inflation and the Fed remain chiefly in mind for investors, analysts said.

"What happens over the remainder of the year will depend on investors' perceptions of the Fed," said Joseph Keating, chief investment officer at First American Asset Management. "If it looks like inflation is in check and the economy isn't growing too fast, then we're in for a good run."

The retail sector saw some pressure as companies reported mixed sales results for November. Wal-Mart Stores Inc. fell 53 cents to $48.03 as November sales at stores open at least a year, known as same-store sales, rose 4.3 percent, as expected. Rival Target Corp.'s sales were slightly below Wall Street estimates, but its stock gained 29 cents to $53.80 on a bullish holiday sales forecast.

Gap Inc. saw a 4 percent drop in November same-store sales, though its shares edged 2 cents higher to $17.40, while Abercrombie & Fitch Co. rose 42 cents to $61.74 after reporting a 23 percent jump in its monthly sales.

In earnings news, Warner Music Group Corp. narrowed its quarterly loss from a year ago and posted a modest gain after accounting for one-time costs. Warner Music climbed $1 to $19.05.

Knight Ridder Inc. jumped 53 cents to $60.93 after The Wall Street Journal reported that three private buyout firms were considering making a bid for the media company.

The Russell 2000 index of smaller companies rose 12.92, or 1.91 percent, to 690.21.

Advancing issues led decliners by more than 7 to 2 on the New York Stock Exchange, where volume came to 1.89 billion shares, compared to 1.8 billion traded yesterday.

Overseas, Japan's Nikkei stock average surged 1.74 percent, lending support to other global markets. In Europe, Britain's FTSE 100 was up 1.16 percent, France's CAC-40 gained 1.51 percent for the session, and Germany's DAX index climbed 1.41 percent.