Stocks surged on the first trading day of 2013 after lawmakers agreed a deal to avoid massive tax hikes and spending cuts that had threatened to hurt economic growth.
The gains come after stocks ended 2012 with their strongest day in more than a month, which put the S&P 500 up 13.4 percent for the year, after a flat performance in 2011.
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Late on Tuesday, the House of Representatives voted for a bill that will raise taxes on wealthy individuals and families and preserve certain benefits.
The vote averted immediate austerity measures, like tax hikes for almost all U.S. households, although it didn't resolve other political showdowns on the budget due in coming months. Spending cuts of $109 billion in military and domestic programs were only delayed for two months.
"Many investors are feeling confident heading into 2013 following a year of strong equity market returns, and the recently signed deal," said Jonathan Golub, strategist at UBS in New York.
"Unfortunately, our sense is that the most important structural issues will continue to be pushed off into the future, leaving significant uncertainty about the long-term direction of the economy and corporate profits."
The Dow Jones industrial average was up 255.72 points, or 1.95 percent, at 13,359.86. The Standard & Poor's 500 Index was up 28.75 points, or 2.02 percent, at 1,454.94. The Nasdaq Composite Index was up 75.18 points, or 2.49 percent, at 3,094.70.
Bank shares rose following news that U.S. regulators are close to securing another multibillion-dollar settlement with the largest banks to resolve allegations that they unlawfully cut corners when foreclosing on delinquent borrowers.
Bank of America Corp rose 4 percent to $12.06 and Wells Fargo shares added 2.4 percent to $35. JPMorgan Chase & Co shares rose 3 percent to $44.96.
Boosting the technology sector, Apple shares rose on a report that the most valuable technology company has started testing a new iPhone and the next version of its iOS software.The stock was up 3.9 percent at $552.86.
Shares of Zipcar Inc jumped 48 percent to $12.21 after Avis Budget Group Inc said it would buy Zipcar for about $500 million in cash to compete with larger rivals Hertz and Enterprise Holdings Inc.
On the macroeconomic front, U.S. manufacturing expanded slightly in December, rebounding from an unexpected contraction the prior month, an industry report showed on Wednesday.
A separate report showed U.S. construction spending fell in November for the first time in eight months, as an extended bout of weakness in the business sector outweighed modest growth in outlays on residential projects. The equity market's reaction to both reports was muted.
On the last day of trading in 2012, the Dow Jones industrial average gained 166.03 points, or 1.28 percent, to close at 13,104.14. The Standard & Poor's 500 Index gained 23.76 points, or 1.69 percent, to finish at 1,426.19. The Nasdaq Composite Index gained 59.20 points, or 2.00 percent, to close at 3,019.51.
In 2012, the Dow advanced 7.3 percent, while the Nasdaq climbed 15.9 percent.
(Editing by Bernadette Baum)