Stocks rose Wednesday as investors welcomed news of an $11 billion deal combining retailers Kmart Holding Corp. (KMRT) and Sears, Roebuck and Co. (S) and a report showing core inflation rose only slightly more than expected.

The Dow Jones industrial average (search) ended up 61.92 points, or 0.59 percent, at 10,549.57. The Standard & Poor's 500 Index (search) was up 6.51 points, or 0.55 percent, at 1,181.94. The technology-laced Nasdaq Composite Index (search) closed up 21.06 points, or 1.01 percent, at 2,099.68.

The Nasdaq closed at a ten-month high. However, all the indexes closed off their session highs. Earlier, the S&P and Dow had been up more than 1 percent.

"This is a terrific rebound, and startling in the face of the twin jumps in inflation that we've had over the last couple of days. The market is definitely saying that inflation is not the problem right now, it's still a question of growth," said Ken Tower, chief market strategist for Schwab's CyberTrader.

Discount chain operator Kmart soared $7.78, or 7.7 percent, to $109.00, on its plan to merge with Sears, a deal that will create the nation's third-largest retailer. Sears stock skyrocketed after the merger was announced, rising $7.79, or 17 percent, to $52.99.

"Mergers are bullish in general, because they show business confidence," Tower said. "I think the merger just backs up the economic stuff. It's part of the same growth-in-the-economy theme."

The combined company is expected to have $55 billion in annual revenues, 2,350 full-line and off-mall stores, and 1,100 specialty retail stores, meaning it will trail only Wal-Mart Stores Inc. (WMT) and Home Depot Inc. (HD). Other retailers posted declined on the news; Wal-Mart shed 65 cents to $56.24, Home Depot closed down 72 cents at $42.28, and Target Corp. (TGT ) lost 36 cents to $51.02.

Stocks retreated from session highs after a mid-afternoon jump in oil prices. Higher crude prices hurt stocks because of the impact on corporate profits and consumer spending.

"I think the reversal in oil probably prompted the reversal in the stock market -- they've had a inverse relationship," Joseph Keating, Chief Investment Officer at Asset Management Group, AmSouth Bank.

"But the market has had one very nice ride since its most recent lows in October."

Martha Stewart Living Omnimedia (MSO) rose $1.09, or 6.3 percent, to $18.49, as investors bet the merger would lead to a broader merchandising agreement. Kmart sells Martha Stewart products in the United States, while Sears sells the company's products in its stores in Canada.

Meanwhile the Labor Department (search) said surging energy costs drove U.S. consumer prices up by a hefty and larger-than-expected 0.6 percent last month, the biggest jump since May. However, cxcluding volatile food and energy prices, so-called core inflation rose a moderate 0.2 percent, just a touch higher than the 0.1 percent gain expected on Wall Street.

Coming on the heels of a sharp increase in the Producer Price Index on Tuesday, analysts said the market was pleased with the CPI reading because it suggests it may be easier than previously believed for companies to pass along rising costs to consumers. That suggests that down the line, corporate earnings may not get squeezed as much by rising inflation.

"Obviously higher prices are a concern, but the fact that they're able to pass a lot of these costs along makes it less of a concern, and not as big a negative as investors feared yesterday when they saw that whopping PPI number," said Jack A. Ablin, chief investment officer at Harris Private Bank.

Separately, industrial production shot up 0.7 percent, a reading that suggests the sector is gaining momentum. Home buildings showed strength after the Commerce Department reported a 6.4 percent jump in housing construction last month.

After the closing bell shares of Applied Materials Inc. (AMAT) the largest producer of chip-making equipment, fell 98 cents to $17.17 on the Inet electronic brokerage. The company reported a sharply higher quarterly profit on Wednesday on stronger demand for advanced manufacturing tools but said special items boosted fourth quarter earnings per share by 2 cents.

Dow component Hewlett-Packard Co. (HPQ) rose 2.6 percent, or 52 cents to $20.20, after the computer and printer maker reported fourth-quarter results that beat Wall Street expectations. Excluding charges, HP earned 41 cents per share, 4 cents better than the average analyst estimate.

Crude oil futures rising nearly a dollar near the close curbed some buying of shares. NYMEX crude for December delivery snapped a four day losing streak to shoot up 73 cents to settle at $46.84 a barrel.

Trading was heavy, with 1.68 billion shares changing hands on the New York Stock Exchange, above the 1.4 billion daily average for last year. About 2.2 billion shares were traded on Nasdaq, above the 1.69 billion daily average last year.

Advancers outnumbered decliners on the NYSE and Nasdaq by about 2-to-1.

The Russell 2000 index, which tracks smaller company stocks, was up 5.08, or 0.82 percent, at 622.97.

Overseas, Japan's Nikkei stock average shed 0.27 percent. In Europe, France's CAC-40 rose 1.31 percent, Britain's FTSE 100 added 0.53 percent and Germany's DAX index surged 1.61 percent.

Reuters and the Associated Press contributed to this report.