Market watchers are anticipating that the Fed on Wednesday will leave rates on hold and say that economic growth is cooling while inflation remains a concern. The central bank has maintained this general stance for several months now, suggesting that rates are staying put.

Investors would ideally prefer a shift in posture toward cutting rates; such a move could boost consumer spending and make mortgages cheaper. But they appeared to be content to hear the status quo for now, and are tentatively optimistic that a rate hike isn't in the offing given that recent economic data has shown slowing growth and that inflation, though high, hasn't been running rampant.

"What is likely is no change at all. We might get a little commentary on the housing market nationwide ... but we don't think there's much action in the cards," said Jim Russell, director of core equity strategy for Fifth-Third Asset Management in Cincinnati.

Worries over the flagging housing market, particularly the subprime mortgage industry, have been dragging down stocks over the past month. But investors got some reassurance Tuesday from a Commerce Department report that construction of new homes rose by 9 percent in February to a seasonally adjusted annual rate of 1.525 million units, higher than the expected 1.450 million. The data wasn't all positive — applications for building permits dropped — but not at all suggestive that the sector is collapsing.

Stocks were also boosted by a fresh slate of takeover activity, notably a $5.93 billion offer to take Affiliated Computer Services Inc. private.

DOW ENDS DAY UP AGAIN

According to preliminary calculations, the Dow Jones industrial average rose 61.93, or 0.51 percent, to 12,288.10, after rising 115.76 on Monday.

Broader stock indicators gained as well. The Standard & Poor's 500 index advanced 8.88, or 0.63 percent, to 1,410.94, and the Nasdaq composite index added 13.80, or 0.58 percent, to 2,408.21.

Bonds also rose, as the Treasury markets shrugged off the housing data and an announcement from China that the country doesn't intend to build up its reserves. The yield on the benchmark 10-year Treasury note fell to 4.55 percent from 4.57 percent late Monday.

Advancing issues outnumbered decliners by more than 2 to 1 on the New York Stock Exchange, where volume came to 1.46 billion shares, up slightly from 1.44 billion shares at the same point on Monday.

Overseas, Japan's Nikkei stock average rose 0.90 percent. Britain's FTSE 100 gained 0.50 percent, Germany's DAX index advanced 0.43 percent, and France's CAC-40 rose 0.81 percent.

Gold prices rose. The dollar was little changed against the euro, but slipped versus the yen.

Crude futures rose 14 cents to $56.73 a barrel on the New York Mercantile Exchange. Gasoline futures briefly leaped to a six-month high due to refinery problems, but then retreated ahead of U.S. inventory data Wednesday.

The Russell 2000 index of smaller companies was up 6.55, or 0.83 percent, at 793.60.

CONCERNS LINGER ABOUT SUBPRIME LENDERS

The Fed has kept rates on hold for five straight meetings following two years of gradual hikes. Russell of Fifth-Third Asset Management said he expects the Fed later this year to consider rate cuts, but because last week's consumer and producer price indexes showed inflation rising, "it's a little early for us to hope for this specific event," he said.

Concerns about subprime lenders, who make loans to people with poor credit ratings, continue to dog the markets. People's Choice Financial Corp., which operates a subprime mortgage unit, filed Tuesday for Chapter 11 bankruptcy protection, and Fannie Mae said it will no longer allow New Century Financial Corp. to sell mortgage loans to the U.S. government-sponsored company.

A bright spot in the sector, however, was news that subprime mortgage lender Accredited Home Lenders Holding Co. received a commitment for a $200 million term loan from Farallon Capital Management LLC, a San Francisco-based money manager.

Accredited Home rose $1.82, or 20.3 percent, to $10.77.

Economists, including former Federal Reserve Chairman Alan Greenspan last week, have said that if the housing market doesn't weaken too substantially, the financial troubles of subprime lenders shouldn't leach into the broader economy.

MERGER NEWS HELPS STOCKS

Talk of possible acquisitions also supported stocks Tuesday. An investment group that included Affiliated Computer Services' founder and chairman made an offer to take the company private, while speculation arose over media reports on other deals: that Palm Inc. is a takeover target for both Nokia Corp. and a private equity investor, that an investment firm is close to signing a deal to acquire Claire's Stores Inc., and that American International Group Inc. could be attempting to acquire Prudential PLC.

Affiliated Computer Services rose $8.66, or 16.9 percent, to $59.95.

Palm rose 63 cents, or 3.5 percent, to $18.77.

Claire's rose $1.12, or 3.6 percent, to $31.23.

Ever-surging takeover activity has been a positive signal to investors that the economy isn't weakening quickly enough to prevent companies from inking deals.

"We're glad that credit is not being shut down. That's clearly on display today. We like that a ton," Russell said.

A potential deal to unite Dutch bank ABN Amro Holding NV with British bank Barclays PLC helped lift the Dow more than 115 points on Monday.

Investors were also relieved by Oracle Corp.'s third-quarter earnings after the closing bell. The database and software maker reported profit, after excluding certain items, of 25 cents a share, above the average expectation. Oracle rose 3 cents in after-hours trading, after closing up 2.2 percent at $17.55.

John Hancock Funds equity trader Neil Massa noted, however, that many investors are waiting on the sidelines until the Fed's statement Wednesday.

"There seems to be a wait-and-see mood," Massa said. "I would wait until tomorrow to make a call."

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