Stocks snapped a three-day losing streak on Friday as investors bought beaten-down shares including banks on bets the financial regulation bill won't be as onerous as some had feared.
Nonetheless, the benchmark S&P 500 index was down 10.6 percent from its April 23 high in what is traditionally considered a correction as investors fled risky assets on fears the euro zone's debt crisis will crimp global growth.
Bank shares rose a day after the U.S. Senate approved a sweeping overhaul of regulation of Wall Street firms, capping months of wrangling over the biggest changes since the 1930s.
The Senate bill reduced uncertainty on what the final bill will look like, analysts said, which could still be watered down in negotiations with the House. Bank stocks jumped after having taken a beating on expectations the bill would cut profits. JP Morgan Chase & Co was the Dow's top boost, surging 5.9 percent to $40.05.
It seems to be a little less onerous than people had anticipated, but the devil's in the details and there's still a lot to play out on that, said David Katz, chief investment officer at Matrix Asset Advisors in New York.
The Dow Jones industrial average <.DJI> gained 125.38 points, or 1.25 percent, to 10,193.39. The Standard & Poor's 500 Index <.SPX> jumped 16.10 points, or 1.50 percent, to 1,087.69. The Nasdaq Composite Index <.IXIC> rose 25.03 points, or 1.14 percent, to 2,229.04.
Trading was choppy throughout the session as May equity options and some options on stock indexes will stop trading at Friday's close and settle on Saturday.
I think that May expiration is adding a little bit more volatility to the market, said Joe Cusick, senior market analyst at online brokerage optionsXpress in Chicago.
Early in the session the S&P 500 briefly fell below its lowest level of the May 6 flash crash. For the week, the S&P ended down 4.2 percent, the Dow lost 4 percent and the Nasdaq was down 5 percent.
The Senate bill must now be merged with a measure approved in December by the U.S. House of Representatives. Top Democratic lawmakers said they aim to get a bill approved by a House-Senate conference committee to President Barack Obama to sign by July 4.
Bank of America Corp rose 4.7 percent to $15.99, while the S&P financial sector index <.GSPF> gained 3.6 percent.
Goldman Sachs Group Inc advanced 3.3 percent to $140.62 on rumors of a possible settlement with the Securities and Exchange Commission of fraud charges, though sources familiar with the matter said no agreement had been reached.
Helping to ease worries about sovereign debt, Germany's parliament approved a bill to allow the country to contribute to rescue aid for Greece and other euro zone nations burdened with high debt loads.
In earnings news, Dell Inc fell 6.8 percent to $13.35 a day after reporting a gross margin that fell short of analysts' forecasts.
Investors were also tempted back into the market after a nearly 4 percent sell-off on Thursday, the biggest one-day drop since April 2009, that left stocks at cheap valuations.
There's a complete disconnect between benign levels of both interest rates and inflation and the fact that S&P 500 multiples are so low when the economic fundamentals in the U.S. are still pretty positive, said Phil Orlando, chief equity market strategist, at Federated Investors, in New York.
At Thursday's closing level, the S&P 500's 14-day Relative Strength Index had fallen below 30 for the first time since the benchmark hit 12-year lows in March 2009, indicating the index was oversold.
Volume was strong for a second day in a row with about 14.69 billion shares traded on the New York Stock Exchange, the American Stock Exchange and Nasdaq, well above last year's estimated daily average of 9.65 billion.
Advancing stocks handily outnumbered declining ones on the NYSE by 2,348 to 740, while on the Nasdaq, advancers beat decliners 1,737 to 939.
(Additional reporting by Doris Frankel in Chicago; Editing by Kenneth Barry)