Data from the Institute for Supply Management indicated that the manufacturing sector is continuing to expand, albeit at a slower pace, and a component within the index that measures prices paid by purchasing managers suggested inflation remains in check. That, combined with an influx of capital amid questions about whether the proposed European Union constitution would be approved, added up to good news for U.S. markets, said Hugh Johnson, chairman and chief investment officer of Johnson Illington Advisors.

"The Fed has told us they will continue to raise rates at a measured pace, but each decision will be made on the basis of existing or current conditions. And current conditions tell me that it's not a sure bet the Fed will raise rates at their June 30 meeting," Johnson said. "It's good news. But look: Whenever there's a lot of money chasing securities, prices are going to go up, and right now you have a lot of capital flowing in from Europe."

The Dow Jones industrial average rose 82.39, or 0.8 percent, to 10,549.87, rising as much as 123.51 before giving up some of its gains as oil prices surged more than $2.60 per barrel.

Broader stock indicators also moved sharply higher. The Standard & Poor's 500 index was up 10.72, or 0.90 percent, at 1,202.22. The Nasdaq composite index climbed 19.64, or 1 percent, to 2,087.86.

Trading at the NYSE was halted several minutes before the market closed due to communications problems.

Bonds continued to build on Tuesday's rally; the yield on the 10-year Treasury note dropped to 3.88 percent, from 3.98 percent late Tuesday. The euro slid to its lowest level against the dollar in eight months as voters in the Netherlands joined France in rejecting the EU constitution, putting any economic reforms it might bring on hold. Gold prices rose.

Oil futures soared, climbing $2.63 to $54.60 per barrel on the New York Mercantile Exchange on concerns that strong demand for diesel will leave it and other distillate fuels, including heating oil, in short supply later this year. Government inventory data, due Thursday, was also expected to influence trading.

Earlier in the day, investors had been encouraged by remarks from Federal Reserve Bank of Dallas president Richard Fisher, who suggested the current rate tightening cycle is drawing to a close. Referring to the previous eight interest rate hikes, which brought the federal funds rate to 3 percent, Fisher told The Wall Street Journal, "We've gone through eight innings here, 25 basis points an inning." Many analysts saw this as a sign that the next hike could be the last.

The ISM's manufacturing index came in at 51.4 for May, its lowest level since June 2003, and below the 52 economists expected. Wall Street was pleased, however, that it hadn't dropped below 50, which would indicate a contraction; as long as the index remains above 50, it means the sector is continuing to expand, as it has for the last 24 months. In addition, the "prices paid" component, which measures the percentage of purchasing managers that report paying higher prices for raw materials, declined substantially, from 71 percent in April to 58 percent in May.

"I think we're at an inflection point where bad news is starting to become good news," said Bryan Piskorowski, market analyst at Wachovia Securities. "The weak ISM number coupled with the weak prices paid number, and the Dallas Fed president's comments ... those pieces of information are all wrapping together to create some light at the end of the tunnel with respect to the Fed."

In company news, shares of Google Inc. climbed 3.9 percent, or $10.73, to $288, after analysts at Credit Suisse First Boston raised the target price for the stock to $350 per share from $275 per share. Piper Jaffray raised its target price for Google to $300 on Tuesday.

Delta Air Lines Inc. was down 3 cents at $3.82 after the company said it renegotiated its credit agreement with General Electric Co.'s GE Capital division. The deal allows the airline to free up more money to cope with rising fuel prices.

SBC Communications Inc. slid 10 cents to $23.28 after confirming it would offer high-speed Internet access for $14.95 per month for new residential subscribers — far lower than its competitors.

School Specialty Inc. gained 20 percent, or $7.78, to $47, on news the educational products distributor will be acquired by Bain Capital Partners LLC, a private equity group, in a deal worth about $1.5 billion.

Advancing issues outnumbered decliners by about 3 to 1 on the NYSE. Preliminary consolidated volume came to 1.83 billion shares, compared with 1.92 billion traded Tuesday.

The Russell 2000 index of smaller companies was up 7.03, or 1.14 percent, at 623.74.

Overseas, Japan's Nikkei stock average rose 0.47 percent. In Europe, Britain's FTSE 100 was up 0.95 percent, France's CAC-40 climbed 1.40 percent and Germany's Xetra DAX gained 1.49 percent.