Stocks rose Tuesday, with the S&P 500 closing above 1,200 for the first time in more than three years, as the Federal Reserve reassured markets by hiking interest rates by an expected quarter-point.

The Dow Jones industrial average (search) rose 38.13 points, or 0.36 percent, to close at 10,676.45, based on the latest data. The Standard & Poor's 500 Index (search) advanced 4.70 points, or 0.39 percent, to end at 1,203.38. The Nasdaq Composite Index (search) climbed 11.34 points, or 0.53 percent, to finish at 2,159.84.

The Dow was at its highest since March and the Nasdaq closed at a new high for the year — its loftiest level since June 2001.

''Undoubtedly, there seems to be a reawakening of merger and acquisition activity, and signs are there that people are continuing to spend at a healthy clip,'' Olsen said. ''Put those two things together, and this rate increase, which was widely expected, and whatever surprises the market has seen have been pleasant surprises.''

Federal Reserve (search) officials, as was widely expected, raised U.S. interest rates by a quarter-percentage point for the fifth time this year and said it will keep gradually lifting them from rock-bottom levels to forestall inflation.

The economy ''appears to be growing at a moderate pace despite the earlier rise in energy prices and labor market conditions continue to improve gradually,'' the Fed said in a brief statement after the meeting.

Stocks moved solidly into positive territory on the news, as buyers who had stuck to the sidelines ahead of the announcement returned to the market

"Greenspan was saying that the economy is moving along strongly enough that rate hikes won't slow it too much — I think that encouraged the market to move higher," said Brian Williamson, vice president, equity trading, The Boston Co. Asset Management.

The Fed's latest move suggests there is "a green light for further rate increases," said Hans F. Olsen, chief investment officer at Bingham Legg Advisers, who thinks the markets are already anticipating a series of gradual hikes to at least 3 percent next year. In the near-term, getting 2004's final rate hike out of the way helped investors focus on the day's other news.

"There seems to be a reawakening of merger and acquisition activity, and signs are there that people are continuing to spend at a healthy clip," Olsen said. "Put those two things together, and this rate increase, which was widely expected, and whatever surprises the market has seen have been pleasant surprises."

Adding to the market's upbeat mood, oil prices appeared to be holding steady in the $41 range. Light, sweet crude for January delivery settled up 81 cents, or 2 percent, at $41.82 per barrel on the New York Mercantile Exchange (search), nearly $14 cheaper than the record settlement price of $55.17 set in October.

Buoying tech stocks, The New York Times reported that Symantec Corp. (SYMC), was in talks to acquire Veritas Software Corp. (VRTS) for $13 billion. A deal could be announced later this week, the newspaper said. Symantec tumbled $5.41, or 16 percent, to $27.45; Veritas surged $2.19, or 8.7 percent, to $27.38.

Verizon Communications Inc. (VZ) shed 24 cents to $41.04 on reports that the company's wireless arm would offer $36 billion for Nextel Communications Inc. (NXTL), topping Sprint Corp.'s $35 billion offer. Nextel was unchanged at $29.99, while Sprint climbed 66 cents to $25.10.

Intel Corp. (INTC), the world's dominant chip maker, gained 2.7 percent, or 61 cents, to $23.24. RBC Capital Markets boosted its first-quarter revenue estimate by $500 million, citing a solid outlook for Intel's line of communications chips and PC microprocessors.

But aluminum producer Alcoa Inc. (AA) weighed on the Dow, falling nearly 2 percent, or 56 cents, to $31.75 after JP Morgan reduced its rating on the stock to "neutral" from "overweight."

Diversified manufacturer General Electric Co. (GE) nudged down 10 cents, or 0.3 percent, to $37.38. GE said Tuesday it expects earnings per share to grow between 10 percent and 15 percent in 2005, boosted by strong growth from its financial and energy units.

American Express Co. (AXP) gained 91 cents to $55.95 after landing a major credit card distribution pact with Citigroup, part of the company's effort to co-market its cards with a variety of financial institutions. Citigroup rose 3 cents to $46.80.

In a filing with regulators, Merck & Co. (MRK) said it plans to cut an additional 700 jobs before the end of the year, adding to the 4,400 job cuts already planned. Merck added 57 cents to $29.62.

Home accessories retailer Pier 1 Imports Inc. (PIR) soared $1.13, or 6.3 percent, to $18.99 after reporting it had earned 22 cents per share in the latest quarter, matching Wall Street expectations. The company's outlook for future profits was also in line with analysts' estimates.

Video chain Blockbuster Inc. (BBI) said it was ending late fees from Jan. 1 on movies or games as it battles growing competition from online rental services. It said operating income is expected to be flat in 2005.

Trading was active, with 1.5 billion shares changing hands on the New York Stock Exchange, above the 1.4 billion daily average for last year. About 2.25 billion shares were traded on Nasdaq, above the 1.69 billion daily average last year.

Advancers outnumbered decliners on the NYSE by a ratio of about 5 to 3, and by about 3 to 2 on Nasdaq.

Market watchers broadly welcomed the Fed's announcement.

The Russell 2000 index of smaller companies was up 5.51, or 0.86 percent, at 643.54.

Overseas, Japan's Nikkei stock average surged 1.17 percent. In Europe, Britain's FTSE 100 closed down 0.30 percent, France's CAC-40 gained 0.22 percent and Germany's DAX index added 0.29 percent.

Reuters and the Associated Press contributed to this report.