Durable-goods orders, which include cars, appliances and machinery, reflect not only business spending, but also consumer confidence. The July increase equaled a 1.3 percent rise in June; both months produced the strongest gains since a 4.1 percent leap in December.

Light, sweet crude rose $1.88 to settle at $118.15 a barrel on the New York Mercantile Exchange on worries that Tropical Storm Gustav could enter the Gulf of Mexico as a hurricane and disrupt oil and natural gas production.

"The strength in durable goods is just the latest indication that manufacturing is actually holding in quite well, and that's a really big plus," said Stuart Schweitzer, global markets strategist at JPMorgan Private Bank.

The Dow Jones industrial average rose 89.64, or 0.79 percent, to 11,502.51 after rising more than 140 points. The Standard & Poor's 500 index gained 10.15, or 0.80 percent, to 1,281.66, and the Nasdaq composite index rose 20.49, or 0.87 percent, to 2,382.46.

Trading was light because many investors are fitting in vacations ahead of Labor Day. Low volumes tend to skew the market's moves.

The rise in oil prices weighed on companies such as airlines, which have been hit hard by rising costs for jet fuel. It also buoyed names in the energy sector.

Northwest Airlines Corp. fell 79 cents, or 8.27 percent, to $8.76, while US Airways Group Inc., parent of Philadelphia's dominant carrier, fell 26 cents, or 3.54 percent, to $7.08.

Oil refiner Tesoro Corp. rose $1.84, or 11.10 percent, to $18.41, while Valero Energy Corp. added $1.42, or 4.23 percent, to $35.02.

Several retailers advanced after signaling that business is stronger than some on Wall Street might have expected.

Borders Group Inc. rose $1.03, or 19.22 percent, to $6.39 after the bookseller reported better-than-expected second-quarter results and slashed debt.

Clothing retailer Talbots Inc. jumped $2.82, or 28.20 percent, to $12.82 after the company raised its forecast for 2008 per-share earnings.

Chico's FAS Inc. rose 50 cents, or 9.82 percent, to $5.59 after the women's apparel retailer's fiscal second-quarter profit fell sharply but beat Wall Street's expectations.

Financials also rose as the durable-goods report lifted overall investor sentiment and eased fears that a further economic slowdown will hit banks and other lenders.

Bank of America Corp. rose 63 cents, or 2.17 percent, to $29.65, and was the biggest percentage gainer among the 30 Dow stocks. Merrill Lynch & Co. Inc. rose $1.17, or 4.85 percent, to $25.27.

Shares of mortgage financiers Fannie Mae and Freddie Mac rose for a third straight session as analysts questioned whether a bailout of the government-chartered companies was imminent. Fannie Mae rose 86 cents, or 15.30 percent, to $6.48, while Freddie Mac rose 78 cents, or 19.65 percent, to $4.75.