The rally was sparked initially as retail sales exceeded expectations and concerns eased about Europe's debt crisis.

Stocks maintained their gains after the Fed announced mid-afternoon that it will hold steady on monetary policy while acknowledging a mildly brighter economic outlook.

Ending a one-day policy meeting, the Fed said recent financial market strains have eased while offering few clues on the chances for further monetary easing.

Euro-zone finance ministers gave final approval to a second bailout for Greece, and a German index of analysts' and investors' sentiment rose much more than expected in March.

Data in the United States once again indicated a slowly improving domestic economy, as retail sales recorded their largest gain in five months in February despite rising gasoline prices.

"Europe has improved from a crisis situation to a chronic condition,'' said Stephen Wood, chief market strategist at Russell Investments in New York. "The data in America continues to grind upward, and investors can more effectively assess risk."

Underscoring the upbeat sentiment, the CBOE Volatility Index or VIX, fell to levels not seen since mid-2007. Its 14-day moving average is at its lowest since last June.

Analysts say the lack of volatility has helped dry up volume, as high-frequency traders see fewer opportunities for quick gains.

But others worry that low volume points to a lack of commitment to the market that can make it vulnerable.

Monday's volume of 5.24 billion shares traded on the New York Stock Exchange, NYSE Amex and Nasdaq represented the lowest tally of the year and was 33 percent below last year's daily average during March.

The European Union, the United States and Japan formally asked the World Trade Organization to settle a dispute with China over restrictions on exports of raw materials, including rare earth elements critical to electronics makers.

Beijing said the export curbs were motivated by environmental concerns, adding that it would defend itself.

Shares of Molycorp , a rare earth oxide producer that owns a rare earth project outside of China, shot up 7.7 percent. The company's stock has climbed 4 percent or higher in daily moves more than a dozen times this year.

Despite the upbeat retail data, shares of Urban Outfitters dropped 5.3 percent to $27.96 after it said it expects margins to continue to be pressured.

Yahoo sued Facebook over 10 patents that include methods and systems for advertising on the Web, opening a major legal battle among big technology companies in social media.

Apple shares were higher after Jefferies raised its earnings estimates and price target for the tech giant, citing an expectation that 2012 sales for the iPhone will be higher. It also says concerns being raised about the new iPad are overdone.

Acquisitions also boosted the shares of both Midas and Great Wolf .

Midas will be taken private by TBC for $11.50 a share in cash. Shares of the automotive services provider closed Monday at $8.99.

Great Wolf, an indoor waterpark operator, also is being acquired by an affiliate of private equity firm Apollo Global $5 per share in cash, compared to Monday's close of $4.19.

US Airways shares traded higher after the airline registered several internet domain names that hint of a possible transaction involving bankrupt American Airlines parent AMR.

In a statement to CNBC, US Airways said it is studying the potential opportunities in such a transaction, but that the purchase of the domain names is merely a way to protect its trademarks.

Shares of both Express Scripts and Medco were trading higher after the companies said they are delaying the close of their $29 billion merger.

In a filing with the Securities and Exchange Commission, the companies said they want to give antitrust regulators more time to finish assessing the deal, hoping to avoid presenting regulators with a deadline that would prompt them to block the deal.

European shares closed at the highest level in nearly eight months.

Asian stocks closedhigher, also on signs of improvement in the US economy.