Updated from 4:15 p.m. EST

Stocks reversed early losses and closed higher Monday afternoon amid seemingly dovish comments from a Federal Reserve official and a spate of M&A activity.

The Dow Jones Industrial Average rose 25.48 points, or 0.21%, to 12,423.49, and the S&P 500 added 3.13 points, or 0.22%, to 1412.84. The Nasdaq Composite was up 3.95 points, or 0.16%, at 2438.20.

The major indices rebounded after Fed Vice Chairman Donald Kohn said in a speech that economic growth will be moderate but sustainable in 2007, while inflation pressure is expected to weaken.

"The economy appears to be weathering the downturn in housing with limited collateral effects, and inflation appears to be easing with the aid of lower energy prices, well-anchored inflation expectations, and competitive labor and product markets," Kohn said, speaking in Atlanta. Still, he warned that a decrease in inflation was "by no means assured."

"Things seem to fit a scenario of expectations that the economy is slowing, but the inflationary prospects seem under control," said Barry Hyman, equity market strategist with EKN Financial. "Energy prices lately are aiding that case."

Traders have been hoping that the Fed will cut rates sometime in 2007, though recent data have shown economic strength. On Friday, stocks dropped on a stronger-than-expected report on the labor market, fueling concerns that the Fed not only won't be in a rush to lower rates but could potentially raise them. The Dow dropped 82 points, the S&P 500 lost 8.6 points, and the Nasdaq fell 19.

"The market's turnaround comes from Kohn's speech being more dovish," said Robert Pavlik, chief investment officer with Oaktree Asset Management. "The economy is due for a soft landing, and that's playing to the Street's expectations. Kohn says the economy seems to be weathering the storm, which helped turned this market around."

Volume was strong to start the week, with 2.82 billion shares changing hands on the New York Stock Exchange. Advancers beat decliners by a 10-to-7 margin. Volume on the Nasdaq reached nearly 1.97 billion shares, with losers matching winners.

By sector, chip stocks were among the top gainers. The Philadelphia Semiconductor Sector Index added 0.6%. On the losing side, health care stocks as measured by the NYSE Healthcare Index finished lower by 0.4%.

Weighing on stocks earlier in the day was a downgrade of Wal-Mart ( WMT) from Goldman Sachs. Analyst Adrianne Shapira cut the retail behemoth to neutral from buy and lowered her stock price target to $51 from $53. She also revised her 2007 and 2008 profit forecasts lower. Wal-Mart was off by 39 cents, or 0.8%, to close at $47.

Fellow Dow component IBM ( IBM) traded higher after UBS upgraded the stock to buy from neutral. The firm also raised its stock price target for IBM to $118 from $100. Shares rose $1.48, or 1.5%, to $98.90.

Several mergers were in the news, including Forest Oil ( FST), which said it plans to buy Houston Exploration ( THX) for about $1.5 billion in stock and cash. Forest will also assume $100 million of Houston Exploration's net debt.

General Electric ( GE) said it will take over Vetco Gray, a Houston-based oil and gas fields equipment supplier, for about $1.9 billion. Vetco Gray is a subsidiary of Vetco International Ltd, which is owned by private equity firms Candover, 3i Group and JPMorgan Partners. Shares of GE dipped by a penny to $37.55.

Elsewhere, United Surgical Partners ( USPI) agreed to be acquired by an affiliate of buyout firm Welsh Carson for $31.05 a share in cash, or $1.38 billion. The deal offers a 13% premium to Friday's closing stock price for Dallas-based United Surgical, a manager of short-stay surgical facilities. United Surgical Partners was higher by $3.19, or 11.7%, to close at $30.58.

Crude oil futures fell by 22 cents to close at $56.09 a barrel, even after Saudi Arabia pledged to follow through on the production cuts it agreed to in a previous OPEC meeting. There was also talk of further OPEC cuts.

On Friday, crude finished with gains after briefly falling below the $55-a-barrel level earlier. The increase halted a two-session decline that dropped oil prices by roughly 8%.

"The small bounce in crude actual helped save the market," said Marc Pado, U.S. market strategist with Cantor Fitzgerald. "Oil and energy stocks also bounced, providing some upside for investors to focus on."

Gold futures rebounded slightly from last week's decline, adding $2.50 to finish at $609.40 an ounce. Last week, gold dropped nearly 5% and ended the week at its lowest level since October.

With little data on the economic docket, the benchmark 10-year Treasury note fell by 3/32, yielding 4.66%. The 30-year bond was unchanged, yielding to 4.74%. The dollar was easing against other major currencies.

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