NEW YORK (

TheStreet

) -- Stocks rallied to their best day in more than a year Monday, holding onto gains throughout the session and gaining strength into the closing bell, powered by the

European Union's $1 trillion plan to contain its debt crisis.

The

Dow Jones Industrial Average

soared 405 points, or 3.9%, to 10,785. For the blue-chip index, it was the biggest point and percentage gain since March 2009. The

S&P 500

gained 49 points, or 4.4%, to finish at 1160, and the

Nasdaq

advanced 109 points, or 4.8%, to 2375. The Nasdaq notched its largest one-day gain since October 2008.

"I think in the morning you not only had short-covering, but some buying going on," said Robert Pavlik, chief market strategist at Banyan Partners. "And then around 1 p.m. we got some pressure from shorts who tried to test the conviction of the market, and that hasn't been making much headway. Either the shorts got squeezed so bad this morning because of the bailout, or there's a sense that every time

we tested around the10,710 level on the Dow buyers sort of started stepping up."

"I do think that a lot of this is a relief rally," said Jay Suskind, senior vice president at Duncan Williams. "They're calling

the EU plan the nuclear option or the European TARP, and just as in the days surrounding our TARP, there was a lot of volatility as people weren't really sure what to make of it. On the one hand, it shows the market that everyone is involved. But it's also going to bring to the surface questions about the U.S.' position in all of this."

Both analysts said today's close would be of particular import, as a late-session selloff could have been a weakening headwind going into tomorrow's session.

"If they start selling into this, then I think we'll be in for a rougher week," he said.

Overseas, Hong Kong's Hang Seng gained 2.5%, while Japan's Nikkei rose 1.6%. The FTSE in London soared 5.2%, and the DAX in Frankfurt jumped 5.3%.

European contagion fears came to a head near the end of last week, making it the worst week of the year. Investors feared the worst Thursday, sparking a frenzied selloff that saw little resolve as markets extended losses on Friday. The Dow, which lost 5.7% on the week, had its ninth-worst weekly performance. The S&P 500 and the Nasdaq, meanwhile, finished down by 6.4% and 8%, respectively.

While investors applauded the bailout today, Pavlik said two camps are developing that will guide the markets going forward. One group is more focused on the success of the short-term fix, allowing market participants to concentrate on better economic news. The other, bearish group is more focused on the rescue package's inability to fix fundamental issues, which it sees as compounding problems later.

"Is this the panacea, the cure, for what's been ailing the market? I can understand the point," Pavlik said. "Pushing problems down the road. But what else are we going to do? You can't really solve the problem overnight."

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The Economy

Three days after the market's

frenzied selloff there still hasn't been any official word about

what triggered the unusual trading activity, although some suspect a

market access loophole may be the place to look for answers.

Securities and Exchange Commission

Chairwoman

Mary Schapiro met with heads of the major exchanges today to discuss the problem.

The Associated Press

reported that the exchange representatives agreed generally on the need for systemwide slow-down mechanisms, or so-called "circuit breakers," to be used during acutely disquieting trading.

President Obama nominated Solicitor General

Elena Kagan to the Supreme Court to replace the retiring Justice John Paul Stevens.

Late Monday, the

Federal Reserve

said in a statement that it approved five, small offerings under its Term Deposit Facility, meant to test the TDF system possibly as early as June. Though term deposits are one tool central bankers may ultimately use to drain liquidity, the central bank also said that the test will "have no implication for the near-term conduct of monetary policy."

There were no economic reports during Monday's session.

Overseas,

U.K. Prime Minister Gordon Brown said he will step down in September, clearing the path for potential coalition talks between the Liberal Democrats and Brown's Labour Party.

>>Overview

>>Company News

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Company News

Monday's rally was broad-based and led by conglomerates.

Caterpillar

(CAT) - Get Report

was the Dow's top-performing stock, followed by

Bank of America

(BAC) - Get Report

,

General Electric

(GE) - Get Report

and

Boeing

(BA) - Get Report

. Though no Dow components ended the day in the red,

Wal-Mart

(WMT) - Get Report

was the blue-chip average's worst-performing stock, followed by

Verizon Communications

(VZ) - Get Report

and

Kraft Foods

( KFT).

The Dow saw volume of 313.4 million shares, compared with an average of 200 million.

McDonald's

(MCD) - Get Report

saw global comparable sales jump 4.9% in April. U.S. sales rose 3.8%. McDonald's stock rose 3.8%, to $70.58.

Fannie Mae

( FNM), which said it has a net worth deficit of $8.4 billion, asked the U.S. Treasury for more money to cover continued losses. The stock added 3.9%, to $1.07.

Tyson Foods

(TSN) - Get Report

swung to a second-quarter profit of 42 cents a share on improvements across its beef and pork segments. Analysts had been expecting earnings of 34 cents a share. Tyson's stock shed 2% $18.24.

Lack of visibility amid aggressive price promotion by retailers in private-label milk prompted

Dean Foods

(DF) - Get Report

to suspend its full-year guidance. The company reported adjusted first-quarter earnings of 23 cents a share, compared with an adjusted profit of 52 cents a share a year ago. The stock was the weakest on the

New York Stock Exchange

, plunging 28.4%, to $10.47.

Sony

(SNE) - Get Report

expects to report a full-year net loss of 41 billion yen ($440 million) when it releases results on Thursday. The guidance represents an improvement from a year-ago loss of 98.9 billion yen. Shares gained 4.3% to $34.31.

Dynegy

(DYN)

reported first-quarter net income of $145 million, or 24 cents a share -- which includes mark-to-market gains of $253 million -- compared with a net loss of $335 million, or 40 cents a share, a year ago. Analysts had been expecting a loss of 10 cents a share. The stock went ahead by 13.5%, to $1.35.

Comtech Communications

(CMTL) - Get Report

agreed to buy

CPI International

( CPII) in a deal valued at roughly $472.3 million. Comtech's stock added 3.9%, to $32.26, while shares of CPI gained 20.5%, to $15.72.

Peabody Energy

(BTU) - Get Report

submitted a reduced bid to pick up a controlling interest in Australia's

Macarthur Coal

, partly because of Australia's new tax on mining profits. Peabody shares picked up 9% to close at $44.60.

Shares of

Moody's

(MCO) - Get Report

weren't taking part in Monday's rally. The stock lost 6.8% on recent filing showing that the SEC sent Moody's a Wells notice on March 18 indicating that the regulator is considering administrative proceedings and a cease-and-desist proceeding against the rating agency.

>>Overview

>>The Economy

>>Commodities and the Dollar

>>Treasuries

Commodities and the Dollar

Crude oil for June delivery settled $1.69 higher at $76.80 a barrel.

Elsewhere in commodity markets, the June gold contract fell by $9.60 to settle at $1,200.80 an ounce.

The

dollar was trading lower against a basket of currencies with the

dollar index down by 0.3%.

>>Overview

>>The Economy

>>Company News

>>Treasuries

Treasuries

The benchmark 10-year Treasury weakened 1 1/32, lifting the yield to 3.543%.

The two-year note declined 3/32, raising the yield to 0.868%. The 30-year bond fell 2 15/32, increasing the yield to 4.414%.

--Written by Melinda Peer and Sung Moss in New York

.

>>Overview

>>The Economy

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>>Commodities and the Dollar