A plunge in crude prices on Tuesday tempered global inflation fears and drove the U.S. dollar to its highest level in 10 months and stock markets in Europe and the United States to solid gains.
Oil's tumble to a session low of $105.46 a barrel came after early reports showed Hurricane Gustav had spared major U.S. oil infrastructure along the Gulf Coast. But with other storms forming outside the Gulf, oil prices cut their losses.
U.S. government bonds rose as crude's steep slide helped ease inflation worries. Euro zone government debt fell. Weak economic data also contributed to the price rise, which drove yields to recent lows.
The euro fell to a seven-month trough against a resurgent dollar, sliding below $1.45, as oil's slide stoked expectations of interest rate cuts outside the United States.
Investors sold off their positions in oil and other raw materials following Gustav's weaker-than-expected impact. The Reuters-Jefferies CRB index , a benchmark for global commodities, slid to 6-1/2 month lows.
European and U.S. stocks rose as oil's drop buoyed hopes of a recovery in consumer and business spending, key pillars of profit growth. Energy shares suffered.
Stock gains were broadly-based, with shares of airlines, big manufacturers and consumer-oriented companies among the standouts. Financial, technology and home-builder stocks also advanced nicely as investors bought beaten-down sectors.
"Oil has decisively broken below its 200-day moving average and has taken all commodities with it," said Ted Oberhaus, manager of equity trading Lord Abbett & Co. in Jersey City, New Jersey. "The bubble has burst. That's been one of the reasons that equities have been held in check."
Shares of conglomerate General Electric rose more than 3 percent to $29.02, and were a top boost to the S&P 500. Aircraft maker Boeing gained 2.4 percent to $67.14.
Among airlines, shares of UAL Corp, parent of United Airlines, rose 16 percent to $12.90, while the airline index surged 9 percent.
Major U.S. airline stocks lost most of their value over the past year as fuel prices soared.
Retailer Target Corp's shares jumped 4 percent to $55.14. The S&P retail index gained 4.4 percent.
Banking shares jumped, even after a Wachovia analyst said the third quarter will be a "quarter to forget" for Wall Street investment banks and slashed its estimates for Goldman Sachs, Lehman Brothers and Morgan Stanley .
Before 1 p.m., the Dow Jones industrial average was up 114.48 points, or 0.99 percent, at 11,658.03. The Standard & Poor's 500 Index was up 4.02 points, or 0.31 percent, at 1,286.85. The Nasdaq Composite Index was up 5.93 points, or 0.25 percent, at 2,373.45.
In Europe, banking shares rallied. BNP Paribas rose more than 4 percent, Credit Agricole was up nearly 4 percent, Dexia advanced 3.6 percent and Fortis gained 4 percent.
But lower crude prices pressured energy stocks. BP, Royal Dutch Shell , gas producer BG Group and Tullow Oil shed between 1.8 and 5.1 percent.
The FTSEurofirst 300 index of top European shares closed 0.91 percent higher at 1,200.20 points, but is still down 20 percent so far this year.
The dollar pared gains against the euro after data showed U.S. factory activity unexpectedly shrank slightly in August.
The Institute for Supply Management said its index of U.S. national factory activity edged lower to 49.9 in August from 50 in July. Economists had expected an unchanged reading of 50.
Combined with an increasingly bleak UK economic outlook, the dollar's broad strength pushed sterling further below $1.78 to its lowest since April 2006.
The dollar rose against major currencies, with the U.S. Dollar Index up 0.57 percent at 78.046. Against the yen, the dollar fell 0.67 percent at 108.76.
The euro fell 0.55 percent at $1.4524.
Crude traded below $109 a barrel after sliding to five-months lows.
U.S. light sweet crude oil fell $6.57 to $108.89 a barrel.
Gold dropped more than 3 percent to below $800 an ounce after oil's drop and dollar strength slashed bullion's appeal.
Silver, platinum and palladium also fell heavily, losing between 3 percent and 5 percent.
"Gold's leading the way down," said Commerzbank trader Rory McVeigh. "We've seen a shift in emphasis where people are now selling commodities to move their assets back into dollars."
Spot gold prices fell $11.65 to $805.45 an ounce.
A steep fall in costs for U.S. manufacturers surprised some investors and helped bolster bond prices.
The benchmark 10-year U.S. Treasury note rose 19/32 to yield 3.75 percent. The 30-year U.S. Treasury bond gained 29/32 to yield 4.37 percent.
Asian stocks fell to a 2-year low, led by sharp losses in Japan, where confusion reigned about the country's leadership.
Japan's Nikkei share average ended down 1.8 percent at a 5-month low, as investors grappled with the implications of the resignation of Prime Minister Yasuo Fukuda, the second Japanese leader to resign in less than a year.
An index of Asia-Pacific equities outside Japan slid 0.6 percent to an 18-month low.