Glimmers of hope about Japan's nuclear crisis and investor Warren Buffett's comments about a buying opportunity for Japanese stocks also boosted investor sentiment.
A&T Inc said it would pay $39 billion for Deutsche Telekom AG's T-Mobile USA, sparking a sharp rally in European telecom shares.
AT&T shares were up 2.5 percent to $28.64. In European market, Deutsche Telecom rose 13.1 percent and Vodafone Plc was up 3.9 percent.
But competitor Sprint Nextel Corp shares were down 14.1 percent at $4.33.
The fact that companies are confident to do big deals gets people thinking that the environment may not be too bad, that there is liquidity out there in the market. It opens doors for other, larger M&A deals, said John Canally, investment strategist at LPL Financial in Boston.
The Dow Jones industrial average <.DJI> was up 174.03 points, or 1.47 percent, at 12,032.55. The Standard & Poor's 500 Index <.SPX> was up 17.00 points, or 1.33 percent, at 1,296.20. The Nasdaq Composite Index <.IXIC> was up 41.12 points, or 1.56 percent, at 2,684.79.
Investors kept a close eye on events in Japan, where power cables have been connected to all six nuclear reactors at the Fukushima Daiichi power plant damaged by an earthquake and tsunami. The World Health Organization said radiation found in food from the area near the damaged nuclear plant was a serious situation.
The market also closely followed Libya, where Western powers launched a second wave of air strikes early Monday after halting the advance of Muammar Gaddafi's forces on Benghazi and targeting air defenses in the country.
There was little reaction to data showing sales of previously owned U.S. homes fell sharply in February as prices fell to their lowest level in nearly nine years.
(Editing by Padraic Cassidy)