Strong U.S. consumer confidence helped extend Wall Street's rally on Tuesday, with the Dow closing above 13,000 for the first time since May 2008, while oil suffered its biggest loss in 2-1/2 months.
The dollar fell and the euro rose in anticipation of a huge offering of cheap cash from the European Central Bank to banks.
With a day to go before the end of February, the Dow Jones industrial average <.DJI> was up 3 percent on the month and more than 6 percent for the year.
The Nasdaq <.IXIC> hit highs not seen since 2000, with technology stocks among the day's best performers. The S&P 500 <.SPX> settled above the March 2011 peak, signalling the rally may have legs.
I don't see anything technically favouring a downturn right now, said Chris Burba, short-term market technician at Standard & Poor's in New York.
No doubt (the market) has been overbought since the beginning of February, but, in a powerful uptrend, price will continue higher for some time amid overbought conditions.
Some analysts argued that the run-up -- built slowly and steadily since the end of November -- had largely been on light volume, and more gains could eventually trigger selling.
Daily volume on the New York Stock Exchange, NYSE Amex and Nasdaq has averaged less than 7 billion shares so far in February. The average in February 2011 was 7.81 billion.
OIL DOWN MOST SINCE DECEMBER
Oil prices suffered their sharpest one-day loss in 2-1/2 months. After Monday's 1 percent drop, which snapped a week-long rally, London's Brent crude fell 2 percent -- the most in a session since December 14.
There is some concern growing that high oil prices may impact the economy and oil demand in future, said Carsten Fritsch, analyst at Commerzbank in Frankfurt. That is leading to profit-taking, which is not surprising given the huge build in speculative net long positions in recent weeks.
Despite the correction, Brent is still up 13 percent on the year. U.S. crude <.CLc1> is up 8 percent year-to-date after a rally through most of February, fed by tensions over Iran's nuclear program and other supply-related issues in the Middle East.
Tuesday's gains in stocks were fueled by a survey showing U.S. consumer confidence hit a one-year high in February, taking into account optimism about the labour market versus concerns over rising gasoline prices in the world's largest economy.
Consumer confidence is key to the U.S. economy, as consumer spending makes up more than two-thirds of economic activity.
This continues the trend we've seen over the past few months, where we're getting data that indicates things are getting better, said Mike Shea, managing partner and trader at Direct Access Partners in New York.
The impact from the consumer confidence reading was offset somewhat by data showing orders for U.S. durable goods fell the most in three years in January. Another report indicated a decline in home prices in December.
U.S. Treasuries initially rallied as the drop in durable goods orders suggested the economy started the year weaker-than-thought. The stronger consumer confidence data later trimmed some of the gains in bonds.
The Dow Jones industrial average <.DJI> settled up 23.61 points, or 0.18 percent, at 13,005.12. The Standard & Poor's 500 Index <.SPX> was up 4.59 points, or 0.34 percent, at 1,372.18. The Nasdaq Composite Index <.IXIC> was up 20.60 points, or 0.69 percent, at 2,986.76.
Wall Street's strength was shadowed by a rebound in world stocks and European shares.
Global stocks, measured by the MSCI ACWI <.MIWD00000PUS>, rose 0.5 percent. The FTSEurofirst 300 <.FTEU3> index of leading European shares ended up 0.2 percent after being down 0.3 percent earlier in the day.
The euro was lifted by the European Central Bank's looming cash boost for banks, even as some investors worried that the benefits of a second injection of cheap money may be short-lived.
The single currency was up 0.5 percent at $1.3460 to the dollar, within view of Friday's three-month peak of $1.3487.
Markets expect European banks to borrow about 500 billion euros ($670 billion) of the cheap funds on offer from the ECB on Wednesday, although forecasts range from 200 billion to 750 billion euros.
The euro has priced in a cash injection of 500 billion euros and anything above 600 billion will be risk positive and push the euro higher, said Ankita Dudani, G-10 currency strategist at RBS Global Banking.
The benchmark 10-year U.S. Treasury note gained 3/32, its yield at 1.9359 percent, as safe-haven bonds drew demand for a second day after the weaker-than-expected U.S. durable goods data.
(Additional reporting by Caroline Valetkevitch, Rodrigo Campos, Robert Gibbons and Herbert Lash in New York and Richard Hubbard in London; Editing by Dan Grebler)