A late afternoon surge capped another wild day on Wall Street Tuesday, bringing the S&P 500 back from the brink of entering a bear market. Stock prices jumped on reports that European officials were working on a joint effort to prop up the region's struggling banks.
The Dow Jones industrial average closed with a gain of 153, erasing a 200-point deficit in the last 40 minutes of trading. It was down for the whole day before turning positive just 10 minutes before the closing bell.
Indexes opened sharply lower as traders worried that Greece could be edging closer to default. Stocks pared their losses at midday after Federal Reserve Chairman Ben Bernanke told a Congressional panel that the central bank could take more steps to stimulate the economy, then slumped again in the afternoon.
At 3:25 p.m., the market began rising quickly after several news outlets reported that European financial ministers were working on a way to coordinate their efforts to support European banks, as they did during the financial crisis in 2008. Worries that U.S. and European banks could get hammered by a Greek default have been a major concern among investors.
"Right now fear is trumping fundamentals and people are buying on nothing more than rumors," said Mark Lamkin, head of Lamkin Wealth Management. "It's not business risk that the market is concerned with, it's systemic risk. If there truly is a solution to Europe's problems, then we'll set the stage for a nice rally."
The Dow closed with a gain of 153.41, or 1.4 percent, to 10,808.71.
The Standard and Poor's 500 rose 24.72, or 2.2 percent, to 1,123.95. It had been down as many as 24 points in morning trading, 20 percent below its April peak. Had the index closed with a decline that size it would have met the typical definition of a bear market.
The technology-focused Nasdaq composite rose 68.99 points, or 3 percent, to 2,404.82.
Smaller stocks rose much more than the overall market. The Russell 2000 index of small companies gained 39.15, or 6.4 percent, to 648.64.
Analysts said the bounce in small companies was likely due to steep losses in the index the day before as investors picked up stocks that they considered cheap. The Russell index plunged 5.4 percent Monday.
Markets have been reacting nervously to worries about Europe's debt crisis. European finance ministers suggested at a meeting Tuesday that holders of Greek debt may be required to take larger losses than originally thought, which would hurt banks that hold Greek bonds. Greece has said it wouldn't be able to shrink its deficit enough to comply with commitments it made to international creditors. Investors fear that a default by Greece could cause another freeze-up in global markets.
"Europe is the center point of all of this," said Paul Zemsky, head of asset allocation at ING Investment Management. "The big fear in the market is that company earnings are not sustainable and that Europe's problems are going to spread into the U.S. banking system."
In testimony before Congress, Bernanke said the central bank is ready to take more steps to stimulate the economy. That could mean another round of bond purchases aimed at lowering interest rates and encouraging lending. Bernanke said the economy is weaker than the central bank expected and that poor job growth continues to undercut consumer confidence. .
The yield on the 10-year Treasury note rose to 1.82 percent from 1.78 percent late Monday. It briefly went as low as 1.72 percent around 10 a.m., near its record low of 1.71 percent reached Sept. 22. Bond yields fall when their prices rise.
Analysts said Europe's debt problems overshadowed signs that the U.S. economy continues to grow slowly, including a 10 percent jump in auto sales in September and an increase in a measure of U.S. manufacturing.
"Collectively, the data here in the U.S. hasn't been that bad, but investors are looking at Europe and saying 'I don't care what the U.S. fundamentals are when we've got much bigger problems overseas that may eventually wash onto our shores,'" said Phil Orlando, chief stock strategist at Federated Investors.
The S&P index has fallen every month since April on mounting concerns about the strength of the U.S. economy and the possibility that the debt crisis in Europe could get worse. The stock market is thought to be forward-looking, reflecting investors' views of the economy in 6 to 9 months.
In corporate news, Bank of America Corp. jumped 4.2 percent to $5.76. It was down 5 percent to $5.24 before the late market surge as investors continued to be troubled by its exposure to soured mortgages securities and a several-day outage of its website. The company's stock lost 9 percent Monday to $5.53, a level not seen since 2009.
Apple Inc. lost 0.5 percent to $372.50. It had been down 5 percent before the late rally after the company unveiled a faster iPhone that fell short of the radical upgrade that some analysts had predicted.
Two stocks rose for every one that fell on the New York Stock Exchange. Volume was heavy at 6.9 billion shares.