The market was relieved to hear from the Commerce Department that U.S. factories saw demand dip in May by just 0.5 percent; most analysts had predicted a decline of more than 1 percent.

Takeover news gave the market an extra boost. Kraft Foods Inc. said it offered $7.2 billion to buy the biscuit division of French food company Groupe Danone SA; Canadian miner Teck Cominco Ltd. bid 4.1 billion Canadian dollars, or $3.87 billion, for Canadian copper miner Aur Resources Inc.; and a major Wendy's International Inc. shareholder said he is considering buying the hamburger chain.

The M&A activity helped the stock market extend Monday's steep gains, but most analysts aren't taking this week's movements too seriously, given that trading volumes are low. The stock market closed early at 1 p.m. EDT.

"Historically, the two days leading up to the July 4th holiday have been positive for the equity markets," said Michael Sheldon, chief market strategist at Spencer Clarke LLC. Investors shouldn't breathe a sigh of relief just yet; the few days after July 4th are often negative, he said, and the market's recent choppiness is expected to continue after that.

"In general, volatility levels have been rising over the last couple of weeks. You're likely to see a pickup in volatility in the third quarter," Sheldon said.

The Dow Jones industrial average rose 41.87, or 0.31 percent, to 13,577.30, adding to Monday's 126.81-point gain.

Broader stock indicators also climbed. The Standard & Poor's 500 index gained 5.44, or 0.36 percent, to 1,524.87, and the Nasdaq composite index lifted 12.65, or 0.48 percent, to 2,644.95.

Bonds fell after the better-than-anticipated factory orders data. The yield on the benchmark 10-year Treasury note rose 5.04 percent from 4.99 percent late Monday.

Homebuilders declined after the National Association of Realtors reported its index for pending sales of existing homes declined in May for the third straight month; however, the broader market shrugged off the data.

Kraft fell 87 cents to $34.66 after saying it made an offer to buy such European brands as LU, Petit Dejeuner, Tuc, and Mikado from Danone. Danone, which rose 1.3 percent in Paris trading, said its board is considering the bid on an exclusive basis.

Wendy's rose $1, or 2.7 percent, to $38.39 after billionaire investor Nelson Peltz said in a letter to Wendy's chairman that his company, which owns fast-food chain Arby's, would be a "natural, strategic buyer" for Wendy's, but that Wendy's is preventing him from doing so.

The financial sector helped lead stocks higher Tuesday, with Merrill Lynch & Co. and JPMorgan Chase & Co. each rising more than 1 percent and Goldman Sachs Group Inc. climbing 2.5 percent.

Airline stocks also jumped Tuesday, after Continental Airlines Inc. reported stronger-than-expected growth in June unit revenue. Continental climbed 11.1 percent; American Airlines parent AMR Corp. rose 4.8 percent; and US Airways Group Inc. rose 7 percent.

Caterpillar Inc., one of the 30 Dow components, declined after being downgraded by a UBS analyst. The heavy machinery maker, which had been the biggest gainer in the Dow Monday, was the blue-chip index's biggest loser Tuesday, falling $2.46, or 3.1 percent, to $77.99.

A barrel of light sweet crude rose 32 cents to settle at $71.41 on the New York Mercantile Exchange. Though the average U.S. retail price of a gallon of gasoline has fallen below $3, crude futures have been trading at 10-month highs.

The dollar rose against most other major currencies, except the British pound, which has strengthened to 26-year highs versus the U.S. currency. Gold prices slipped.

Advancing issues outnumbered decliners by about 5 to 3 on the New York Stock Exchange, where consolidated volume came to 1.52 billion shares — down from 2.50 billion shares Monday, which was a full day of trading.

The Russell 2000 index of smaller companies rose 3.14, or 0.37 percent, to 848.20.

Overseas, Japan's Nikkei stock average rose 0.02 percent. Britain's FTSE 100 rose 0.75 percent, Germany's DAX index added 1.16 percent, and France's CAC-40 rose 0.71 percent.

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