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Deal Talk Fires Up Stocks

The U.S. market climbs as M&A prospects give traders a break from the worries about liquidity.

Updated from 4:08 p.m. EDT

Stocks in New York closed solidly higher Wednesday as merger chatter in the financial sector cheered traders, who have been laid low recently by the troubles in the credit market.

The

Dow Jones Industrial Average

gained 145.27 points, or 1.11%, to 13,236.13. All but two of the Dow's 30 stocks were in the black, led by a 4.7% gain in

Alcoa

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.

The

S&P 500

added 16.95 points, or 1.17%, to 1464.07, and the

Nasdaq Composite

rose 31.50 points, or 1.25%, to 2552.80.

While the major averages finished mixed on Tuesday amid concerns about the credit crisis and whether the

Federal Reserve

will cut rates, a potentially big tie-up was acting as a buying catalyst.

According to

The Wall Street Journal

,

E*Trade Financial

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and

TD Ameritrade

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were in discussions for a possible deal that would create a $20 billion brokerage firm.

E*Trade ended lower by 2.1% to $15.25, while TD Ameritrade climbed 4.9% to $17.15.

But that wasn't the only development on the M&A front.

MGM Mirage

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approved a $5 billion transaction in which holding company Dubai World will take a 9.5% stake in the casino operator and get 50% ownership in the company's CityCenter project in Las Vegas. MGM surged $6.62, or 8.9%, to $80.94.

Meanwhile,

Nymex Holdings

(NMX)

said it has held discussions with potential buyers. The stock jumped $7.28, or 6.1%, to $126.06.

NYSE Euronext

(NYX)

, considered to be one of the interested parties, added 1.4%.

"The market was heartened by the fact that M&A activity has given the signal that maybe the worst has passed," said Paul Nolte, director of investments with Hinsdale Associates. "The part that has been concerning is that volume has been choppy. While the market has gone up, it hasn't been with a lot of participation."

On the

New York Stock Exchange

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, 3.19 billion shares changed hands, with advancers topping decliners by a 13-to-3 margin. Volume on the Nasdaq reached 1.81 billion shares, with winners outpacing losers nearly 2 to 1.

On Tuesday, the Dow lost 30.49 points, or 0.2%, to 13,090.86, and the S&P 500 added 1.57 points, or 0.1%, to 1447.12. The Nasdaq was up 12.71 points, or 0.5%, at 2521.30.

New York's major averages rose to session highs at midday after Senate Banking Committee Chairman Christopher Dodd (D., Conn.) said Fed Chairman Ben Bernanke will take advantage of all the tools he has to stabilize the markets. The rally lost steam after Richmond Fed President Jeffrey Lacker said the recent volatility couldn't justify a rate cut and that there is still reason to be worried about inflation.

"Obviously, there has been some deterioration in the financial markets as lending standards have gotten tougher and credit concerns have risen. However, the global economy continues to remain strong and the U.S. economy is moving forward at a moderate pace," said Robert Pavlik, chief investment officer with Oaktree Asset Management.

The subprime and credit concerns haven't disappeared though, he warned.

"While the Fed said they stand ready to act, it seems to me that a rate cut isn't necessary at this time," he said. "I'm not 100% sure the Fed will move to cut rates. The markets could be susceptible to a pullback if the Fed does not cut rates."

Following the Fed's cut of the discount-lending window last week, four big banks said they have each borrowed $500 million from the Federal Reserve Bank of New York.

Citi

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said it made the move on behalf of unnamed clients, while

JPMorgan

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,

Bank of America

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and

Wachovia

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said they took their loans to demonstrate the value of the Fed as a lender.

There were still signs of turbulence in the financial sector.

Lehman Brothers

(LEH)

said it is shuttering its subprime lender BNC Mortgage, resulting in the termination of 1,200 positions in 23 locations.

Lehman said it will take an after-tax charge of $25 million and a goodwill write-down of $27 million. The stock finished with a gain of $1, or 1.7%, at $58.54.

Earnings also made headlines. Homebuilder

Toll Brothers

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said third-quarter earnings tumbled 85% from a year ago on writedowns and cancellations. Results still topped Wall Street's expectations, and shares gained $1.06, or 5%, to $22.15.

Mining concern

BHP Billiton

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said income jumped 28% over the last year due to strong commodity prices. BHP also added that it didn't expect to be harmed by the issues in the credit market. BHP ended up $1.99, or 3.5%, to $59.59.

Among ratings change, both UBS and JPMorgan Chase upgraded home-repair retailer

Lowe's

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to buy and overweight, respectively. Lowe's rose 91 cents, or 3.2%, to $29.82.

Energy prices were also in focus, as the Energy Department posted its weekly inventory report. The data showed a rise of 1.9 million barrels in crude inventories last week. Distillate stocks rose by 1.3 million barrels, while gasoline inventories fell 5.7 million barrels.

The front-month October crude contract eased 31 cents at $69.26 a barrel. Gasoline prices, meanwhile, rose 2.5 cents at $1.89 a gallon.

Treasury bonds were losing ground. The 10-year note was down 8/32 in price, raising the yield to 4.63%. The 30-year bond was off 6/32 in price, yielding 4.96%. The dollar was trading higher against the yen on speculation the Bank of Japan will abstain from hiking interest rates.

Global indices were mostly higher. Overnight, Hong Kong's Hang Seng Index jumped 2.8%. In Europe, London's FTSE was up 1.7% and Germany's Xetra Dax added 1.1%.