Investors interpreted Bernanke's testimony before Congress as a sign the Fed is close to ending its streak of interest rate hikes. Bernanke told the Senate Banking Committee, "We think inflation is going to moderate," and said the Fed's previous policy actions, such as rate hikes, could still affect the economy. However, he hedged the inflation outlook by talking about risks that could send prices higher.

Two government reports indicated the economy is slowing, with core inflation coming in lower than expected and new home construction falling. Strong earnings from International Business Machines Corp., United HealthGroup Inc. and two of the nation's largest banks also bolstered stocks, which slumped last week on intensified violence in the Middle East.

"The market has been in selloff mode," said Jim Herrick, director of equity trading at Baird & Co. "Today, at least, the geopolitical issues are put on the back burner and the focus is on earnings and comments from Bernanke."

The Dow rose 212.19, or 1.96 percent, to 11,011.42.

Broader stock indicators also gained sharply. The Standard & Poor's 500 index rose 22.95, up 1.86 percent, to 1,259.81, and the Nasdaq composite index rose 37.49, or 1.83 percent, to 2,080.71.

The Russell 2000 index of smaller companies rose 20.70, or 3.04 percent, to 702.34.

Advancing issues led decliners by more than 6 to 1 on the New York Stock Exchange.

Bernanke's remarks also sent European stocks up sharply. Britain's FTSE 100 rose 1.69 percent, Germany's DAX index added 2.64 percent, and France's CAC-40 gained 2.37 percent. Earlier, Japan's Nikkei stock average rose 0.44 percent.

Bonds recovered, rising sharply following an earlier decline. The yield on the 10-year Treasury note plummeted to 5.05 percent, down from 5.14 percent yesterday and 5.18 percent earlier today. The U.S. dollar dropped against other major currencies. Gold prices also fell.

Crude oil futures fell for the third straight session. A barrel of light crude settled at $72.66, down 88 cents, in trading on the New York Mercantile Exchange.

The stock market's advance follows months of trading characterized by sharp one-day up or down swings.

"I think we are limited to spasmodic moves like this, one-day wonders," said Jon Brorson, head of growth equities at Neuberger Berman in Chicago. "We're still going to be buffeted by concerns about the economy."

To be sure, some observers felt the market was hearing everything positive Bernanke said and ignoring his many caveats. While he laid out the conditions that would make the Fed pause its rate hikes, it isn't clear the economy currently meets those prerequisites, as the day's inflation numbers made clear.

The Labor Department said the Consumer Price Index rose by 0.2 percent in June, the smallest increase in four months. But core inflation, which excludes energy and food, rose by 0.3 percent in June, higher than the 0.2 percent Wall Street expected. That increase left core inflation rising for the past three months at an annual rate of 3.6 percent, far above the Federal Reserve comfort zone of 2 percent or less.

Meanwhile, the Commerce Department said construction of new homes softened, falling by 5.3 percent in June, another sign that the once-booming housing market is slowing.

In company news, IBM rose $1.81, or 2.4 percent, to $76.07 after it reported second-quarter earnings of $2.02 billion, or $1.30 per share, on revenue of $21.9 billion. Its earnings beat analysts estimates.

Bank of America Corp. rose $1.51, or 3.1 percent, to $49.95 after the company, the second-largest U.S. bank, said its acquisition of credit-card company MBNA Corp. helped lift second-quarter profit above Wall Street projections.

JPMorgan Chase & Co., rose $2.34, or 5.8 percent, to $43.05 after the nation's third-largest bank said its profit grew strongly in the second quarter. Net income was above analysts' projections.

Yahoo Inc. fell $7.04 to $25.20, a two-year low. The 22 percent drop came after its second-quarter profit declined and the company said a new advertising platform would be delayed. Last year's quarter was skewed by Yahoo's sale of its remaining stake in rival Google Inc., while this year's reflected new rules for accounting for stock options.

UnitedHealth Group rose $2.53, or 5.2 percent, to $50.93, after the company, the nation's second-largest health insurer, said its second quarter profits rose 26.5 percent. The company benefited from the acquisition of PacifiCare Health Systems and growth across its other businesses. It also raised its guidance for the rest of 2006 and issued bullish 2007 guidance.

Preliminary consolidated volume on the NYSE was 2.83 billion, up from 2.58 billion at the same time yesterday.