U.S. stocks rallied on the back of strength in financial shares are a drop in oil prices on reports that Libyan leader Moammar Gaddafi may be negotiating an exit from the country.

The Dow Jones Industrial Average jumped 124.35 points, or 1.03 percent, to 12,214.38; the S&P 500 index gained 11.69 points, or 0.89 percent, to 1321.82; and Nasdaq Composite climbed 20.14 points, or 0.73 percent.

Bank of America (NYSE: BAC) surged 4.70 percent – fuelling a rally in the financial sector --- after CEO Brian Moynihan provided a very upbeat multi-year outlook at and also said the bank plans to increase its share buyback program and might raise its dividend.

Urban Outfitters (Nasdaq: URBN) plunged 16.66 percent on weaker-than-expected fourth quarter earnings.

Oil prices fell 0.64 percent to $104.77 per barrel in New York on conflicting and vague reports that Gaddafi and Libyan rebel groups may be in negotiations to settle on a peace deal.

Bonds fell as the yield on the benchmark 10-year U.S. Treasury rose to 3.54 percent.

[Get this delivered to your inbox for FREE. Subscribe to our daily Markets Newsletter.]