By Kristina Peterson

Energy and bank stocks led a broad rally Tuesday as investors grew confident in the U.S. recovery and put aside for now their qualms about European sovereign debt.

The Dow Jones Industrial Average (DJI) was recently up 167 points, or 1.6%, to 10,265, led by a 5.8% gain in the shares of Bank of America Corp. (BAC) after it reported "significant gains" in the number of modified mortgages it handles through the government's Home Affordable Modification Program, designed to lower monthly payments for struggling customers.

Elsewhere, the British banking giant Barclays Plc (BCS) announced better- than-expected quarterly earnings, pushing its American depositary shares up almost 14%.

Meetings by European finance ministers over the three-day holiday weekend in the U.S. provided more visibility into the euro zone's coordination to help heavily indebted Greece. Traders are increasingly resigned to the idea that the country's recovery will be gradual, but they're also content that the EU will back up any of its members before their woes spread too widely through the world economy.

"The real thing people have always wondered about with Greece is the question of contagion, what does it mean for Italy and Germany and all the other countries," said Joe Donohue, chief executive of Desert Shores Capital.

"It looks like we're getting closer to resolution on that. In the meantime, the market is very headline-driven, subject to get whipped around at any good or bad news from Europe."

The S&P 500 (SPX) was up 1.7%, led by gains of about 2% each in its financial, energy, materials, and industrial sectors. The Nasdaq Composite Index (RIXF) was up 1.3%.

In U.S. economic news, the Federal Reserve Bank of New York's Empire Manufacturing Survey showed conditions for New York manufacturers improved sharply in February, with its business conditions index rising to 24.91 this month, from 15.92 in January. Economists had expected a reading of 16.0 in February.

The National Association of Homebuilders said its monthly index of U.S. homebuilder confidence grew in February, recovering form a seven-month low. However, the measure is still at lows signaling worry in the housing sector.

The dollar fell as investors took on risk in their portfolios Tuesday. That helped the prices of raw materials, pushing the broad Dow Jones-UBS Commodity Index up 2.6%.

The dollar's pullback and renewed tension over Iran's nuclear ambitions boosted crude oil futures above $76 per barrel. Gold futures also climbed. Gold has been trading as a risk asset in recent months.

Among stocks to watch, Merck & Co. (MRK) gained 1.8% as its fourth-quarter profit and sales rose sharply on its recent takeover of Schering-Plough.

Kraft Foods (KFT) fell 1% as its fourth-quarter revenue came in slightly short of analysts' expectations.

Among stocks in focus, Terra Industries (TRA) jumped 22% after the U.S. fertilizer producer agreed to be acquired by Norway's Yara International (YARIY) in a $4.1 billion cash deal.

Treasurys reversed higher. The 10-year note climbed 5/32 to yield 3.676%.