The rally, which marked the first trading day of 2010, drove both the Dow and the S&P 500 to their highest closes in 15 months, while the Nasdaq ended at a 16-month high.
The Institute for Supply Management's manufacturing index rose to its highest level since April 2006 in December. The report followed similarly strong readings from the commodity-hungry manufacturing sectors in China and India overnight.
That trend and a weaker U.S. dollar helped push natural resource stocks higher as commodity prices rose.
The ISM number was very, very good, and we think it points to continuing strengthening and overall, bodes relatively well in the near-term for the market, said Karl Mills, president of Jurika, Mills and Keifer, an investment advisory firm in Oakland, California.
The Dow Jones industrial average <.DJI> gained 155.91 points, or 1.50 percent, to end at 10,583.96. The Standard & Poor's 500 Index <.SPX> rose 17.89 points, or 1.60 percent, to 1,132.99. The Nasdaq Composite Index <.IXIC> jumped 39.27 points, or 1.73 percent, to 2,308.42.
Volume, although modest, appeared to be the best since December 22nd, with most market participants back at work after a long holiday break.
Energy and materials were the top sectors in the S&P 500 as the prospect of stronger manufacturing lifted stocks there.
Oil companies' shares got a further boost after Deutsche Bank upgraded the U.S. refining sector and raised the ratings on several refiners, including Valero Energy Corp and Sunoco Inc .
Valero jumped 6.8 percent to $17.89, and Sunoco advanced 6 percent to $27.67. The PHLX Oil Service index <.OSX> climbed 3.9 percent.
The Institute for Supply Management said its index of national factory activity rose to 55.9 in December, above forecasts for a reading of 54.3. A reading above 50 indicates expansion.
Both of China's PMI manufacturing surveys rose in December, with the official reading hitting its highest level in 20 months. That was echoed in India, where the manufacturing index hit a 7-month peak last month.
Investors said the reports gave welcome support as investors head into fourth-quarter earnings season later in January. U.S. stocks rose last month after the U.S. unemployment rate unexpectedly fell in November.
U.S. crude oil futures rose 2.2 percent, or $2.15, to settle at $81.51 per barrel after hitting a 2-month high earlier in the session. The U.S. dollar fell 0.5 percent against a basket of currencies <.DXY>. Copper hit a 16-month high.
Currency traders were cautious about the greenback before Friday's non-farm payroll report, which investors are looking to for confirmation of further stabilization in the labor market.
Robert W. Baird upgraded chipmaker Intel Corp to outperform on expectations for a rebound in corporate spending on personal computers. That helped drive the Philadelphia semiconductor index <.SOXX> up 1.7 percent.
Intel, a Dow component and a bellwether on Nasdaq, climbed 2.4 percent to $20.88.
About 1.01 billion shares changed hands on the New York Stock Exchange, while on the Nasdaq, about 1.95 billion shares traded.
Advancing stocks outnumbered declining ones on the NYSE by a ratio of 4 to 1, while on the Nasdaq, nearly 11 stocks rose for every three that fell.
(Reporting by Edward Krudy; Editing by Jan Paschal)