"The crucial issue for the market has been a lack of confidence and the most recent efforts to ease the credit crunch by governments and central banks have been very positive in terms of building confidence," said Subodh Kumar, chief investment strategist at Subodh Kumar & Associates in Toronto.
Led by Britain, European governments agreed to multibillion-dollar guarantees for the banking system in moves that may become a crucial test of investor faith in government's ability to reverse the downward spiral.
The US Federal Reserve, the European Central Bank, the Bank of England and the Swiss National Bank also said they would lend commercial banks as much US dollar liquidity as they needed to ease clogged interbank lending rates. The S&P financial index shot up 10.23 percent.
The Dow Jones industrial average rose 936.42 points, or 11.08 percent, to 9,387.61, its biggest one-day point gain ever and its biggest percentage gain since March 15, 1933.
The Standard & Poor's 500 Index also notched its best single-day point gain, up 104.13 points, or 11.58 percent, to 1,003.35. The Nasdaq Composite Index was up 194.74 points, or 11.81 percent, at 1,844.25, its biggest one-day point gain since January 2001.
The Dow Jones Wilshire 5000 index, one of the broadest measures of US stocks, posted its largest percentage gain ever, closing up 1,040.13 points, or 11.40 percent, to 10,160.63. The $1.2 trillion increase in value was the largest one-day gain ever.
General Motors jumped 33.1 percent to $6.51 after reports that the automaker has been in merger talks with rivals Chrysler LLC and Ford Motor Co, whose shares surged 20.1 percent to $2.39.
Defensive and consumer staples stocks rose as investors picked up shares in companies generally considered better positioned to weather an economic downturn. Johnson & Johnson rose 12.2 percent to $62.68.
Among tech shares, Apple Inc was up 13.9 percent at $110.26, after Citigroup raised its recommendation on the US technology hardware and equipment sector to "market weight" from "underweight." Microsoft gained 18.6 percent to $25.50.
Energy companies tracked the price of oil higher. Crude oil gained $3.49, or 4.49 percent, to settle at $81.19 a barrel on optimism over the governments' moves to shore up confidence in the banking system. Exxon Mobil gained 17.2 percent to $73.08, and Chevron climbed 20.9 percent to $69.89.
Morgan Stanley shares spiked 87 percent to $18.10, while those of Wachovia rose 13.6 percent to $5.85.
In a sign that credit markets may be loosening up, the cost for banks to borrow dollars, sterling and euros from each other over three months fell. But the US Treasury market was closed for the Columbus Day holiday.
"We've had a nice snapback rally in stocks today as we got that favorable piece of news about the investments in the banks," said Bucky Hellwig, senior vice president at Morgan Asset Management, in Birmingham, Alabama.
"But these gains, this momentum, may not be sustainable. We'll see what happens tomorrow when the bond market reopens."
Trading was moderate on the New York Stock Exchange, with about 1.82 billion shares changing hands, below last year's estimated daily average of roughly 1.90 billion, while on Nasdaq, about 2.60 billion shares traded, above last year's daily average of 2.17 billion.
Advancing stocks outnumbered declining ones by a ratio of 20 to 1 on the NYSE and by 7 to 1 on the Nasdaq.
