Updated from 4:09 p.m. EDT

Stocks rallied Monday, with the S&P 500 crossing the psychologically important 1000 mark and the Dow gaining more than 200 points to close at its highest level in almost a year. Investors got a boost from a report showing manufacturing activity rose sharply in New York.

The Dow Jones Industrial Average closed with a gain of 202 points, or 2.2%, at 9319, the highest mark since July 5, 2002. The Nasdaq rose 40 points, or 2.5%, to 1667, while the S&P 500 advanced 22 points, or 2.2%, to 1011.

Treasuries were lower, with the yield on the 10-year note up 7 basis points at 3.18%.

"You can't fight the tape," said equity strategist Peter Boockvar at Miller Tabak & Co. "This is a continuation of the momentum we've been seeing for a while, reinforcing the bet that the economy will improve in the next three to six months, and that earnings will follow."

Among sectors, technology paced the gains, with the Philadelphia Semiconductor Index up 3% and TheStreet.com Internet index up 3.6%. The New York Stock Exchange financial index gained 2.1%.

Boockvar believes stocks can still go higher, although they could first face a benign consolidation, "but nothing like a pullback," he said. "Typically, the market is good at predicting an economic turnaround. But by the same token, it has already discounted the earnings gains expected for this year."

On the NYSE, eight stocks rose for every three that declined, with 1.3 billion shares traded. Almost 1.9 billion shares traded hands at the Nasdaq, with decliners outpacing advancers by a ratio of almost two to one.

"This is a combination of expectations for improvement in the economy for the next couple of quarters and improved liquidity in the system," said Sunil Reddy, portfolio manager at Fifth Third Bank.

Investors applauded the New York Empire State Index, which showed that manufacturing activity rose in May, with the index climbing to 26.8 from 10.6, well ahead of the 8.8 reading that economists had expected. The report suggests that the Philadelphia Fed survey on factory activity in the region, due out this Thursday, will also point to growth, analysts said.

"With consumer spending flagging, it is hard for us to believe that the manufacturing sector is booming. Nevertheless, this reading suggests that the worst is probably behind us," said David Rosenberg, chief North America economist at Merrill Lynch, in his daily economic commentary.

Yahoo! ( YHOO) jumped after the company sealed an agreement with British Telecom ( BTY) to offer co-branded Internet access services in the U.K. Yahoo! also got an upgrade from SoundView. Its shares closed up $1.94, or 6.8%, at $30.66.

The drug sector was in focus following positive news from a few players. Pfizer ( PFE) rose $1.52, or 4.6%, to $34.60. A study showed diabetes patients who took its Lipitor cholesterol drug had fewer heart attacks and strokes.

Biotech company Amgen ( AMGN) said its Enbrel drug had positive effects on rheumatoid arthritis patients, according to a new study. The drug is co-produced with Wyeth Pharmaceuticals ( WYE). Amgen shares advanced $2.50, or 3.9%, to $67.50, while Wyeth shares gained $1.47, or 3.2%, to $47.44.

Cell Therapeutics ( CTIC) jumped $1.73, or 13.3%, to $14.75 after investors got news the company's Xyotax got fast-track status from the FDA.

Guidant ( GDT) plans to discontinue the abdominal implanted devices that last week led to the company's settlement of 10 felony charges and the payment of millions of dollars in fines related to 12 deaths. Shares rose 40 cents, or 1%, to $40.35.

Also in the tech area, J.D. Edwards ( JDEC) rose 73 cents, or 5.6%, to $13.77 after PeopleSoft ( PSFT) sweetened its bid for the software maker by offering $863 million in cash, in a deal that would total $1.75 billion. Oracle ( ORCL), which had made a hostile bid to purchase PeopleSoft, said its offer remains in place. PeopleSoft shares fell 17 cents, or 1%, to $16.75, while Oracle shares rose 17 cents, or 1.3%, to $13.65.

A top executive at Boeing ( BA) said global airline traffic is likely to be higher this year after two years of sharp declines. Boeing also said it has secured a lease order from the Dubai-based airline Emirates for 26 passenger jets in a deal worth $5.6 billion at current prices. Boeing shares closed up $1.07, or 3%, at $36.41.

GE ( GE) reached a tentative agreement with 16,000 union workers regarding pensions, wages and other benefits for the next four years. GE shares rose 69 cents, or 2.3%, to $31.34.

Liberty Media ( L) could complete its offer for Vivendi Universal's ( V) entertainment assets in the next few days, FT.com reported. The deal is expected to be worth between $12 billion and $14 billion. Liberty Media shares lost 4 cents, or 0.3%, to $11.85, while Vivendi shares gained $1.29, or 6.7%, to $20.63.

American Express ( AXP) said it plans to buy Threadneedle Asset Management, a money-management firm in the U.K., for about $570 million in cash. The company's shares climbed $1.16, or 2.7%, to $44.59.

Among research news, Deutsche Bank downgraded BP ( BP), Exxon Mobil ( XOM), Norsk Hydro ( NHY) and ChevronTexaco ( CVX). But the brokerage upgraded Royal Dutch/Shell ( RD). Royal Dutch advanced $1.45, or 3%, to $49.79, while BP rose 55 cents, or 1.3%, to $44.45. Chevron lost 11 cents, or 0.2%, to $74.94, while Norsk shed 36 cents, or 0.8%, to $47.10. Exxon rose 38 cents, or 1%, to $38.31.

Overseas markets were mixed. London's FTSE 100 rose 0.5% to 4152, and Germany's Xetra DAX gained 2.5% to 3248. In Asia, Japan's Nikkei closed 1.6% lower at 8839, while Hong Kong's Hang Seng gained 0.1% to 9862.

Crude oil prices for future delivery were higher in London. The dollar was weaker against the yen and practically unchanged against the euro.

On Friday, the Dow closed down 79 points, or 0.9%, at 9117, while the Nasdaq lost 27 points, or 1.6%, to 1626. The S&P 500 shed almost 10 points, or 1%, to 988.

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