The Dow Jones industrial average (INDU) climbed 260 points, or 2.2%, the S&P 500 (SPX) added 24 points, or 2%, and the Nasdaq (COMP) rose 54 points, or 2%.
Friday's rally was sparked by high hopes that Greece and Italy are "on the right track and moving in the right direction," said Dave Hinnenkamp, CEO at KDV Wealth Management.
Greece swore in a new prime minister, Lucas Papademos, early Friday. Papademos, a former banker and European Central Bank vice president, will now move to form a new national unity government.
Meanwhile, Italy's senate passed a series of austerity measures demanded by Europe, paving the way for Prime Minister Silvio Berlusconi to resign over the weekend.
Investors are hoping that "Berlusconi's departure will usher in a technocratic government that will hopefully implement austerity measures swiftly and aggressively," said Kathy Lien, director of currency research at Global Forex Trading.
But trading will likely remain choppy until more decisive steps are taken toward solving the European debt crisis.
"The problem with this crisis is that almost every few days we get a fresh shock," said David Jones, chief market strategist at IG Markets. "I don't think by any stretch we've seen the worst of this. There's more volatility to come."
The dollar fell against the euro and Japanese yen, and the British pound.
Oil for December delivery added $1.21 to settle at $98.99 a barrel.
Gold futures for December delivery rose $25.20 to settle at $1,784.80 an ounce.
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