updated 12/12/2006 7:16:16 AM ET 2006-12-12T12:16:16

Wall Street extended its advance Monday as investors digested new takeover developments and placed bets ahead of the Federal Reserve’s decision on interest rates.

Major Market Indices

A series of recent acquisition announcements has reassured investors that corporations still think the economy is robust enough to strike deals. About $45.4 billion worth of acquisitions were announced by Standard & Poor’s 500 companies last week, setting up this year to be the best for M&A since 2000.

Driving the Dow Jones industrials was American International Group Inc., which agreed to buy the U.S. port operations of state-owned Dubai Ports World. Hedge fund SAC Capital Advisors LLC bought a stake in miner Phelps Dodge Corp., and said it would oppose the company’s planned takeover by Freeport-McMoRan Copper & Gold Inc.

Speculation about possible deals also helped the market. Medical device maker Biomet Inc. and travel reservation company Sabre Holdings Corp. rose on reports they might be acquisition targets.

“M&A is generally viewed upon as being a positive to the market,” said Steven Goldman, chief market strategist at Weeden & Co. “But the markets will likely stay relatively shallow, ebbing and flowing about whether we’ll cut rates in the first quarter.”

Light volume on Monday indicated investors were a bit more cautious as they adjusted their positions before the Fed’s meeting Tuesday. The central bank raised rates 17 straight times starting in June 2004, then left them unchanged at its last three meetings.

The Dow rose 20.99, or 0.17 percent, to 12,328.48.

Broader stock indicators also advanced. The S&P 500 index rose 3.20, or 0.23 percent, to 1,413.04, and the Nasdaq composite index was up 5.50, or 0.23 percent, at 2,442.86.

Stocks appear to be heading toward double-digit gains for 2006. The Dow is up 15.03 percent, the Nasdaq 10.77 percent, and the S&P 500 13.20 percent.

Bonds rose, with the yield on the benchmark 10-year Treasury note falling to 4.52 percent from 4.55 percent late Friday. The dollar was mixed against other major currencies, while gold prices moved higher.

The price of light sweet crude fell 81 cents to $61.22 on the New York Mercantile Exchange.

Stocks bounced around in morning trading as investors began to place bets of what will come out of the Fed meeting. Policymakers have been trying to engineer an economic soft landing, carefully moderating growth without pushing the economy into a recession.

However, the volatility might not entirely be because of investors guessing which direction the Fed might take.

“It will be all about the Fed’s language, and that might be causing some intraday volatility as people set up their play ahead of the decision,” said Brian Williamson, an equity trader at The Boston Company Asset Management. “But that’s not all of it. What’s happening is that as the market creeps toward a year high, you see some investors exiting their positions.”

Phelps Dodge shares fell 80 cents to $122.87 after SAC Capital Partners, led by financier Steven A. Cohen, made a bid for the Phoenix-based mining company. Last month, Freeport-McMoRan said it planned to buy Phelps Dodge.

AIG rose 65 cents to $71 after the United Arab Emirates sold off its U.S. port operations to the insurance company. Terms of the deal were not disclosed.

Biomet rose $1.64, or 4.1 percent, to $41.54 on a report that U.K.-based Smith & Nephew PLC might bid $11 billion to acquire the medical device maker. There was also speculation that a competing offer might be made by Johnson and Johnson, whose shares shed 25 cents to $65.70.

Sabre, which operates the Travelocity Web site, rose $2.11 to $30.43 on reports it has been in talks with private equity firms about a possible buyout.

Time Warner Inc. hit multiyear highs after it was upgraded by Prudential Securities, which said the stock could advance due to strong potential for improvement at the media conglomerate’s cable division. Shares rose 42 cents to $21.33, surpassing its 52-week high of $20.95.

Harrah’s Entertainment Inc. rose 15 cents to $79.74 on a report the casino operator’s board will meet Wednesday to consider several buyout offers. Private equity firms Apollo Management and Texas Pacific Group have joined together to offer $81 per share, and Penn National Gaming Inc. and hedge fund D.E. Shaw are also said to be considering an offer.

The Russell 2000 index of smaller companies was up 0.51, or 0.06 percent, at 793.07.

Advancing issues outnumbered decliners by about 3 to 2 on the New York Stock Exchange, where volume came to 2.29 billion shares, compared with 2.44 billion on Friday.

Overseas, Japan’s Nikkei stock average closed up 0.67 percent. At the close, Britain’s FTSE 100 was up 0.12 percent, Germany’s DAX index rose 0.65 percent, and France’s CAC-40 added 0.81 percent.

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