Stocks rallied to end higher Monday after a choppy session dominated by merger activity, an earnings restatement from insurance giant AIG, rebounding oil prices and investor caution ahead of the Federal Reserve's meeting.

The Dow Jones industrial average (search) gained 59.19 points, or 0.58 percent, to end at 10,251.70. The technology-laced Nasdaq Composite Index (search) ended higher 7 points, or 0.36 percent, at 1,928.65, while the broader Standard & Poor's 500 index (search) was up 5.31 points, or 0.46 percent, to end at 1,162.16.

It was the highest closing level for the Dow in more than two weeks.

Trading was light as investors anticipated Tuesday's Federal Reserve meeting, where a hike in interest rates is expected to be announced.

Oil prices bounced back after earlier hovering at a 10-week low on higher OPEC supply and swelling crude stocks in the United States.

U.S. light crude rose $1.20 to $50.92 after earlier hitting an intraday low of $49.03 a barrel, the lowest price since Feb. 22 and almost 16 percent below the record $58.28 struck on April 4. The decline in oil prices had eased concerns that higher energy costs will pinch corporate profits and hurt consumer spending.

In economic news, growth in manufacturing activity declined slightly more than expected in April, according to the Institute for Supply Management. The ISM's manufacturing index came in at 53.3, compared to 55.2 in February. Economists had expected a reading of 55. Any reading above 50 represents growth in activity.

On a better note, construction spending rose 0.5 percent in March, unchanged from the previous month but better than the 0.3 percent economists expected, the Commerce Department said.

"There's a certain amount of caution which is preventing investors from putting more assets to work," said Michael Sheldon, chief market strategist at Spencer Clarke LLC. "Right now there are too many question marks about the economy that need to be answered before we can move forward."

Oil stocks led the Dow higher after oil prices rebounded. Exxon Mobil Corp. (XOM) rose 71 cents to $57.74, while Conoco Phillips (COP) rose $1.85 to $106.70.

Among other shares gaining was Home Depot Inc. (HD), rising 89 cents to $36.26 after a positive note from a Smith Barney analyst, which said the home improvement retailer was "less vulnerable to macro and interest rate volatility."

Shares of American International Group Inc. (AIG) climbed $2.59 to $53.44, lifting the blue-chip Dow and the broader Standard & Poor's 500 index, a day after the company said it will restate more than four years of financial reports because of accounting errors that misled investors about its fiscal health.

In merger news, Neiman Marcus Inc. (search) lost $5.36 to $92.96 after the company announced its buyout agreement with two private equity firms. The deal, signaling further consolidation in the retail sector, valued the company at $100 per share.

In other merger news, Qwest Communications International Inc. (Q) added 5 cents to $3.47 after the company officially dropped out of contention for MCI Inc. (MCIP) after Dow component Verizon Communications Inc. (VZ) revised its bid Monday morning. MCI will now go to Verizon for $8.5 billion, even though Qwest still had a $9.85 billion offer on the table. Verizon fell 83 cents to $34.97, while MCI lost 83 cents to $25.70.

Shares of Morgan Stanley (MWD) tumbled $3.23 to $49.39 after the board, in an emergency weekend meeting, endorsed embattled Chairman and Chief Executive Phil Purcell. The board made changes to make it easier to oust Purcell, but did not dismiss him or strip him of the chairman title, actions that were rumored to be possibilities on Friday.

Advancing issues outnumbered decliners by more than 8 to 5 on the New York Stock Exchange, where volume came to 1.56 billion shares, compared to 1.89 billion at the same point on Friday.

The Russell 2000 index of smaller companies was up 6.48, or 1.12 percent, at 585.86.

Overseas, Japan's Nikkei stock average fell 0.06 percent. In Europe, Germany's DAX index gained 0.94 percent and France's CAC-40 rose 0.69 percent. Markets in London were closed for a bank holiday.

Reuters and The Associated Press contributed to this report.