The stock market is starting the holiday week with a big gain.
The Dow Jones industrial average was up 170 points at 12,741 in the final hou of trading Monday. The Standard & Poor's 500 index rose 23, or 1.75 percent, to 1383.65 The Nasdaq composite average gained 54, or 1.9 percent, to 2907.
Leading Democratic and Republican lawmakers expressed confidence that they could reach a deal to avert the fiscal cliff even as they laid down markers on raising taxes and spending cuts that may make any agreement more difficult.
Democratic Senator Dick Durbin said on CNN, "What I hear is a perceptible change in rhetoric from the other side."
Also appearing on CNN, Republican Representative Tom Price said, "Every member of our caucus appreciates that this fiscal crisis, this challenge that we have, is ever closer." Opinion polls show that Republicans would shoulder more of the blame if the country goes over the fiscal cliff.
"A deal that doesn't face healthcare spending head on and also raises taxes of substance with economic growth mediocre is not a good deal. This said, the markets will celebrate any deal in the short term but will likely deal with the economic consequences in 2013," said Peter Boockvar, managing director at Miller Tabak & Co in New York.
European markets rallied before U.S. markets opened. Financial analysts said it was because of optimism that leaders in the United States will reach a deal to avoid tax increases and government spending cuts set to take effect Jan. 1.
"It is quite clear that both sides want to come to a compromise and that a reasonable compromise is available," said David Kelly, chief global strategist for J.P. Morgan Funds, in a note to clients.
A pair of strong corporate earnings reports also boosted Wall Street. Lowe's said its third-quarter profit surged 76 percent. That's after a strong report from Home Depot last week. Lowe's rose $2.18, or 7 percent, to $34.13.
Tyson Foods, the country's largest meat company, also beat Wall Street expectations. Its stock rose $1.18, or 7 percent, to $18.06.
Stocks fell sharply last week, marking their fourth week of declines, as traders fretted about the possibility that lawmakers will fail to prevent the package of spending cuts and tax increases known as the "fiscal cliff."
Stocks rebounded Friday afternoon, however, amid signs that President Barack Obama and Congress were prepared to cede some long-held bargaining positions. House Speaker John Boehner and Senate Minority Leader Mitch McConnell both said they offered higher tax revenue as part of a deal.
Volume was light on the first day of a holiday-shortened trading week. The market is closed on Thursday for Thanksgiving and will close early Friday.
Traders also were following developments in the Middle East as conflict between Israel and Hamas flared. Concerns about instability in the region pushed oil up $1.09 to $88 a barrel in electronic trading on the New York Mercantile Exchange.
Rising crude prices lifted energy stocks, making them the best performers among the 10 industry groups in the S&P 500 index.
Earlier, Asian markets rose more modestly.
The yield on the benchmark 10-year Treasury note rose 1.62 percent from 1.58 percent late Friday, a sign that traders are selling low-risk investments. A bond's yield rises as its price falls.
The Associated Press and Reuters contributed to this report.