U.S. stocks jump on bailout optimism

By Herbert Lash

NEW YORK (Reuters) - The U.S. dollar surged and global stocks clawed back on Tuesday from Wall Street's worst day in 20 years as investors bet Washington will eventually pass a plan to rescue the troubled financial sector.

U.S. and euro zone government debt prices slipped, paring Monday's frantic charge into safe-haven securities. Gold also retreated as the dollar's surge prompted profit-taking on sharp gains after Congress rejected the banking sector bailout plan.

Oil rebounded more than $2 a barrel towards $99 after nearly a 10 percent drop the previous day as fear of a major meltdown in capital markets eased and hope among investors returned.

The dollar jumped 2 percent against the yen and 3 percent against the Swiss franc as cautious optimism Congress will approve a $700 billion (388 billion pounds) plan to bail out banks replaced the shock after U.S. lawmakers rejected the bill.

Strong readings on U.S. consumer confidence and Chicago PMI, a measure of manufacturing activity in the U.S. Midwest, boosted equities and further curbed the appeal of debt. The two September reports tempered fears about the economy's health.

"There are at least some hints of optimism that something will still happen soon with regards to the bill," said Jim Dunigan, managing executive of investments at PNC Wealth Management in Philadelphia. "All eyes are still on Washington."

U.S. stocks rose more than 3 percent, before paring some gains, adding to investor optimism after equity markets in Europe also added solid gains. The defeat in Congress buzzed nearly 9 percent off the broad S&P 500 on Monday.

Before 1 p.m. (1700 GMT), the Dow Jones industrial average .DJI was up 243.00 points, or 2.34 percent, at 10,608.45. The Standard & Poor's 500 Index .SPX was up 33.34 points, or 3.01 percent, at 1,139.73, and the Nasdaq Composite Index .IXIC was up 60.30 points, or 3.04 percent, at 2,044.03.