Late Tuesday, The Guardian reported that Germany and France had reached an agreement to increase the firepower of Europe's recently overhauled bailout fund.
The size of the European Financial Stability Facility (EFSF), will remain at €440 billion, but the "effective lending capacity' of the fund will be €2 trillion, said the report. Details remain murky.
"It seems that the ingredients of how this will all happen are still being worked out," said Frank Davis, director of sales and trading at LEK Securities. "But for now, it's boosting the market."
The Dow Jones industrial average (INDU) rallied 180 points, or 1.6%, The S&P 500 (SPX) rose 25 points, or 2%, and the Nasdaq composite (COMP) increased 43 points, or 1.6%.
Headlines about Europe's debt crisis have been driving the market's roller coaster for several weeks. On Monday, stocks tumbled 2%, as investors worried it may take longer than expected to reach a solution.
Also late Monday, Moody's Investor Services warned that France could be slapped with a negative outlook over the next three months. The rating agency kept its AAA rating on France, but cautioned that the country's finances are among the weakest of its peers that also enjoy a pristine rating.
Tuesday afternoon, Standard and Poor's downgraded two dozen Italian banks and financial institutions, and placed a negative outlook on another batch.
"The unfolding story in Europe is still the biggest issue," said Michael Sheldon, chief market strategist at RDM Financial Group. "We've seen signs of some progress recently, but there's no clear timeline."
The uncertainty presents a new set of risks, said Sheldon, which makes investors increasingly nervous.
"In the past, investors faced risks like inflation, but now there are sovereign risks: countries have accumulated too much debt and could get downgraded, and worse, some could default," he added.
The dollar fell against the euro and the Japanese yen, but rose versus the British pound.
Oil for November delivery rose $1.96 to settle at $88.34 a barrel.
Gold futures for December delivery fell $23.80 to settle at $1,652.80 an ounce.
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