The buyout news, particularly the possibility of an enormous deal that would unite Dutch bank ABN Amro Holding NV with British bank Barclays PLC, propelled stocks higher as investors theorized that companies remain upbeat about the economy if they're willing to cut new deals.

The advance kicked off an important week for economic data; the first reading, a report from the Chicago Federal Reserve, said regional manufacturing slowed in January. The market was also waiting for Tuesday's start of the U.S. Federal Reserve's two-day meeting on interest rates. While few expect the Fed will adjust short-term interest rates, investors will be looking for any change in the central bank's posture that could hint at where rates are headed in the coming months.

Given the volatility that has returned to the marketplace and the upcoming statement from the Fed, market watchers aren't ruling out more big swings in stocks going forward.

"I think the markets are very sentiment driven. It does also appear that when the global markets see recovery in one area they all seem to move up and when they see concern in another market they all seem to move down," said Subodh Kumar, global investment strategist at Subodh Kumar & Assoc. in Toronto.

BIGGEST ONE-DAY GAIN FOR DOW SINCE MARCH 6

According to preliminary calculations, the Dow rose 115.76, or 0.96 percent, to 12,226.17, its biggest one-day gain since March 6, when the index climbed more than 150 points.

Broader stock indicators also rose sharply. The Standard & Poor's 500 index gained 15.11, or 1.09 percent, to 1,402.06, and the Nasdaq composite index advanced 21.75, or 0.92 percent, to 2,394.41.

Bonds fell as stocks made gains. The yield on the benchmark 10-year Treasury note rose to 4.57 percent from 4.55 percent late Friday. The dollar was mixed against other major currencies, rising to 117.59 yen from 116.73 yen late Friday. Gold prices rose.

The advance in U.S. equities came as stocks overseas rose sharply, even after China's central banks raised interest rates to try to cool the economy.

Overseas, Japan's Nikkei stock average rose 1.59 percent, Hong Kong's Hang Seng index advanced 1.65 percent, and the sometimes volatile Shanghai Composite Index rose 2.87 percent. Britain's FTSE 100 closed up 0.96 percent, Germany's DAX index added 1.39 percent, and France's CAC-40 finished up 1.43 percent.

Advancing issues outnumbered decliners by 3 to 1 on the New York Stock Exchange, where volume came to 1.44 billion shares — down from 2.07 billion shares at the same point on Friday, when contract expirations elevated trading volumes.

The Russell 2000 index of smaller companies rose 8.28, or 1.06 percent, to 787.05.

Light, sweet crude fell 52 cents to $56.59 a barrel on the New York Mercantile Exchange amid concerns about slumping demand.

ECONOMIC REPORTS HOLD LITTLE SWAY

"I would attribute what we're seeing to relief that the Asian markets were stronger despite the Bank of China having raised interest rates," Kumar said. "I don't put a lot of faith in the idea that this rally is sustainable. I think we're range-bound."

Investors are trying to determine if the economy can pull off a so-called soft landing or whether areas of weakness such as the housing sector are poised to drag the economy into a pronounced slowdown.

They seemed to look past a report from the Chicago Fed that found Midwestern manufacturing activity pulled back 2.3 percent in January from December to the weakest reading since October 2005. They also appeared to shrug off a decline in sentiment among homebuilders: the National Association of Home Builders said its index of sales activity for new single-family housing slipped to 36 from a reading of 39 in February, which was revised down from 40. It marked the first decline in six months in the index.

More closely watched housing data is due out later this week: Tuesday, the Commerce Department reports on housing starts and building permits, and Friday, the National Association of Realtors reports on home sales, inventories and prices.

"People are watching the housing figures much more than they used to," said Brian Gendreau, investment strategist for ING Investment Management, pointing to the worries over the subprime market, whose troubles could slow down the already struggling housing market.

Concerns about the economy and areas such as the subprime mortgage lending sector, which makes a business of making loans to people with poor credit, helped push stocks lower last week. The Dow industrials fell 1.35 percent, the S&P 500 gave up 1.13 percent, and the Nasdaq composite index slid 0.62 percent.

Gendreau added, though, that delinquencies are fairly isolated geographically, and don't appear likely to damage the wider economy. "It's hard to point to anything fundamentally wrong with this economy," he said.

MERGER NEWS SAVE THE DAY

Merger news helped lift stocks Monday, especially word that ABN Amro, the largest bank in the Netherlands, is a possible buyout target of Barclays. Britain's Sunday Times issued the report, citing anonymous sources. Both companies declined to comment. ABN rose $5.12, or 14 percent, to $41.36, while Barclay's fell 15 cents to $53.35.

In other takeover news, ServiceMaster Co., a provider of housecleaning, landscaping, and pest-control services, agreed to be acquired by an investment group for about $4.48 billion. ServiceMaster rose $1.68, or 12.5 percent, to $15.15.

Also, Community Health Systems Inc., which operates hospitals, agreed to acquire Triad Hospitals Inc. for $54 per share, or about $5.1 billion. Community Health fell $2.02, or 5.5 percent, to $34.78, while Triad rose $2.36, or 4.8 percent, to $51.72.

Another deal announced Monday was oil field-services company Hercules Offshore Inc.'s agreement to buy drilling contractor Todco for $2.3 billion in cash. Todco rose $6.46, or 19.7 percent, to $39.24, and Hercules fell $1.25, or 4.7 percent, to $25.32.

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