NEW YORK  Stocks shot higher Tuesday, gaining back the previous session's sharp losses and then some, after a drop in oil prices and a rise in consumer confidence gave investors some hope for a letup in Americans' financial woes. The Dow Jones industrial average rose 266 points.

Oil prices tumbled more than $2 a barrel Tuesday, finishing at their lowest level in seven weeks as a stronger dollar and beliefs that record prices are eroding the world's thirst for energy sparked another dramatic sell-off.

Light, sweet crude for September delivery fell $2.54 to settle at $122.19 on the New York Mercantile Exchange, extending their two-week-long retreat from record highs above $147.

The prospect of lower energy costs for U.S. consumers, along with a modest uptick in the Conference Board's July index of consumer confidence to 51.9 from 51 in June, came as welcome news to investors. Consumer spending accounts for more than two-thirds of U.S. economic activity.

"The thinking is that oil prices are heading lower, and that's obviously a positive for the market," said Richard E. Cripps, chief market strategist for Stifel Nicolaus.

The drop in oil — which surpassed $4 a barrel at one point during the day — was a throwback to oil's nosedive over the past two weeks and outweighed supply concerns touched off by a militant attack Monday on two Nigerian crude pipelines. It was oil's seventh decline in the last 10 sessions.

A stock bounce was hardly unexpected, though, after the Dow lost nearly 240 points Monday on worries about the sagging financial sector. Wall Street is torn: Energy prices, if they continue on their downward path, could provide big relief to consumers and in turn help the economy, but credit losses keep mounting at the nation's major banks. The result is big swings in the market but little consistent direction.

"We're living from one piece of news to the next," said Alan Gayle, senior investment strategist for RidgeWorth Capital Management. The market's volatility, exacerbated by light summer trading volumes, is likely to continue unless it gets further evidence that oil prices are, indeed, on their way down, and that banks have already seen the bulk of their losses.

In a sign that there could be further asset markdowns for banks, Merrill Lynch announced late Monday that it was writing down another $5.7 billion and selling assets tied to risky debt at a steep discount to Lone Star Funds, a distressed debt investor.

Still, Merrill's moves at least answered lingering questions about the health of the brokerage's balance sheet. And many analysts said the asset sale could help to finally establish a market for all the hard-to-value securities held by various financial institutions.

"The bad news is, there's going to be write-downs. The better news is, we can estimate those write-downs with better clarity," said Alan Gayle, senior investment strategist for RidgeWorth Capital Management. "Nevertheless, this is a hot summer in more ways than one; this volatility reflects continued uncertainty. We're living from one piece of news to the next."

The Dow gained 266.48, or 2.39%, to 11,397.56.

Broader stock indicators also climbed. The Standard & Poor's 500 index rose 28.83, or 2.34%, to 1,263.20, and the Nasdaq composite index rose 55.40, or 2.45%, to 2,319.62.

The Dow and the S&P are now less than 20% below their Oct. 9 record peaks — technically out of bear market territory. The Nasdaq is less than 19% below its Oct. 31 peak. Still, another downturn will put the market back into bear territory, and some analysts would call an advance like Tuesday's a bear market rally.

Advancing issues outnumbered by nearly 4 to 1 on the New York Stock Exchange, where volume came to 1.40 billion shares.

Bond prices fell after advancing a day earlier. The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 4.05% from 4.01% late Monday.

The dollar was mostly higher against other major currencies, while gold prices fell.

Merrill, which plans to issue new stock to raise $8.5 billion, initially saw its stock drop. But shares later rallied to finish up $1.92, or 8%, at $26.25.

Most other financial stocks also bounced higher. Citigroup rose $1.03, or 5.9%, to $18.46; Washington Mutual rose 46 cents, or 11.7%, to $4.40; Bank of America rose $3.97, or 14.2%, to $32.03; and Wachovia rose $1.98, or 14.5%, to $15.61.

Airline stocks also jumped due to slumping oil prices. AMR Corp., the parent of American Airlines, rose $1.47, or 18.4%, to $9.47; Delta Air Lines rose $1.01, or 14.6%, to $7.91; and United parent UAL Corp. rose $1.50, or 21.4%, to $8.51.

Better-than-expected quarterly earnings helped shore up sentiment as well.

United States Steel's profit more than doubled in the second quarter following an increase in demand and pricing. The stock jumped $20.43, or 14%, to $165.76.

Colgate-Palmolive rose $5.59, or 8.2%, to $74.15 after reporting that its second-quarter earnings rose 19%. Price increases helped the consumer products company offset rising input costs.

But on the downside, there was more data pointing to a still sinking housing market. S&P/Case-Shiller said its 20-city index for May declined 15.8% from a year earlier— the sharpest drop since its inception in 2000. The narrower 10-city index is down 16.9%, the biggest decline in its 21-year history.

The Russell 2000 index of smaller companies rose 18.44, or 2.65%, to 714.55.

Overseas, Japan's Nikkei stock average fell 1.46%. Britain's FTSE 100 rose 0.12%, Germany's DAX index rose 0.75%, and France's CAC-40 dipped 0.09%.

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