The market's optimism was also boosted by news that Korea Development Bank is in talks about taking part in a possible acquisition of Lehman Brothers Holdings Inc. Such a move could allay some of Wall Street's worries about the troubled financial sector.
Bill Dwyer, chief investment officer at MTB Investment Advisors in Baltimore, said that beyond relief over the effects from Gustav, investors are betting that a slowing economy will crimp demand for oil. But he said the pointed reactions of the energy and stock markets Tuesday illustrate the overall uncertainty about the economy.
"It just shows you how unstable the market is based on the perception of the macro economic outlook. It changes daily. There isn't a consistent viewpoint of what is actually happening in the economy," he said, noting that stocks fell sharply Friday after economic figures and a weak report from the technology sector unnerved investors.
In midday trading, the Dow rose 170.33, or 1.48 percent, to 11,713.88, after being up more than 200 points in the early going. The Dow lost 171 points Friday.
Broader stock indicators also saw big gains but came off their highs. The Standard & Poor's 500 index rose 10.15, or 0.79 percent, to 1,292.98, and the Nasdaq composite index rose 18.09, or 0.76 percent, to 2,385.61.
Bond prices rose. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.75 percent from 3.82 percent late Friday. The dollar rose against most other major currencies, while gold prices fell sharply.
Investors showed little reaction to a report that U.S. manufacturing activity contracted slightly in August, as expected, and that inflation slowed. The Institute for Supply Management, a trade group of purchasing executives, said its index on manufacturing activity fell to 49.9 in August from 50 in July. Wall Street had expected a reading of 49.9, according to the median estimate of economists polled by Thomson Financial/IFR. A reading below 50 indicates contraction. The ISM also found that inflation lessened.
Lehman Brothers rose 49 cents, or 3.1 percent, to $16.58 after the governor of the state-owned Korea Development Bank said discussions were under way to set up a consortium with private banks to acquire Lehman. The comments follow weeks of speculation that the investment bank could be bought as it struggles amid tightness in the credit markets.
The drop in oil prices sent stocks in sectors like airlines higher. American Airlines parent AMR Corp. jumped $1.50, or 14.5 percent, to $11.83, Delta Air Lines Inc. rose $1.34, or 16.5 percent, to $9.47, while JetBlue Airways Corp. rose 48 cents, or 7.9 percent, to $6.56.
Energy names fell as oil dropped. Exxon Mobil Corp. fell $1.75, or 2.2 percent, to $78.26, while Chevron Corp. declined $2.52, or 2.9 percent, to $83.80.
In other corporate news, technology shares advanced after Google Inc. said it is releasing its own Internet browser to counter Microsoft Corp.'s Internet Explorer. Google rose $14.08, or 3 percent, to $477.37, while Microsoft rose 26 cents to $27.55.
Bank of America Corp. jumped $1.63, or 5.3 percent, to $32.77 and was the biggest gainer among the 30 stocks that make up the Dow industrials after a Goldman Sachs & Co. analyst assumed coverage of the bank with a "Buy" rating, citing potential for earnings growth.
Advancing issues outnumbered decliners by nearly 2 to 1 on the New York Stock Exchange, where volume came to 492.1 million shares.
The Russell 2000 index of smaller companies rose 3.82, or 0.52 percent, to 743.32.
Overseas, Japan's Nikkei stock fell 1.75 percent. In afternoon trading, Britain's FTSE 100 rose 0.32 percent, Germany's DAX index rose 1.51 percent, and France's CAC-40 advanced 1.50 percent.
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