Stocks surged Wednesday as tame core inflation figures eased investors' concerns about aggressive interest-rate hikes while falling oil prices and a Merrill Lynch upgrade boosted market sentiment.

The Dow Jones industrial average (search) rose 132.57, or 1.28 percent, to close at 10,464.45 after rising more than 191 points over the previous two days. The Standard & Poor's 500 index (search) closed up 11.76, or 1.00 percent, at 1,185.56 and the Nasdaq composite index (search) rose 26.50 or 1.32 percent, to 2,030.65.

The Dow and the S&P 500 both ended higher for the third day in a row, and the Nasdaq settled higher for the fourth successive session.

"The benign inflation number and the drop in oil was enough, considering the two-day rally we saw Monday and Tuesday," said Peter Boockvar, equity strategist at Miller Tabak & Co.

The government's consumer price index (search) showed core inflation, which excludes volatile food and energy costs, was flat in April. That soothed investors' concerns about rate hikes and helped boost bank stocks.

"The market was oversold a couple weeks ago, and now we're seeing relief on the two things keeping the market down: rates and oil," said Russ Koesterich, senior portfolio manager at Barclays Global Investments in San Francisco.

"The nice thing about the inflation data is that it shows that higher prices aren't getting passed on to the consumer," Koesterich said.

The unchanged core CPI in April was tamer than the 0.2 percent increase forecast by analysts in a poll by Reuters and reflected the first flat monthly data since November 2003. The overall CPI number was up 0.5 percent, according to Labor Department (search ) data. That compared with the expected 0.4 percent rise.

Meanwhile, prices for crude oil fell after government data showed U.S. commercial oil stocks rose last week to their highest level in six years, topping analysts' exepectations. Prices Futures for light sweet crude oil fell $1.72 to settle at $47.25 a barrel on the New York Mercantile Exchange (search).

"We are awash in crude oil that eventually will make its way into gasoline ... and amount to a tax cut for American consumers," said Michael Driscoll, senior managing director and listed trader at Bear, Stearns, of New York. "You can't downplay the psychological impact of lower prices on consumer, and eventually investor, sentiment."

International Business Machines Corp. (IBM) rose 2.8 percent to $76.36, helping propel the Dow and the S&P 500 to their highest closes since April 13.

Among the Dow's biggest percentage gainers was Hewlett-Packard Co. (HPQ), up 4.6 percent, or $1, at $22.55 a day after it posted higher profit and revenue, cut its payroll and signaled further job cuts.

Microsoft Corp. (MSFT) jumped almost 1 percent, or 24 cents, to $25.70 and Intel Corp. rose nearly 1 percent, or 23 cents, to $25.93, helping the Nasdaq to its highest finish in over two months, after an upgrade of the tech sector by Merrill Lynch.

Delta Air Lines Inc. (DAL) rose 29 cents or 9.6 percent to $3.30 after J.P. Morgan upgraded the stock, saying it doubts the troubled airline will file for bankruptcy this year, as the market seemed to be expecting.

PalmOne Inc. (PALM) rose 46 cents, or 1.8 percent, to $25.69 after the company said it would release its new LifeDrive mobile manager in significant quantities in June.

Trading in stocks was active, with about 1.78 billion shares changing hands on the New York Stock Exchange, above the 1.46 billion daily average for last year. About 2 billion shares were traded on Nasdaq, above the 1.81 billion daily average last year.

Advancing stocks outnumbered decliners on the NYSE by more than 3 to 1 and on Nasdaq by almost 3 to 1.

The Russell 2000 index of smaller companies was up 12.12, or 2.04 percent, to 607.39.

Overseas, Japan's Nikkei stock average rose 0.1 percent. In afternoon trading, Britain's FTSE 100 was up 1.1 percent, Germany's DAX index was up 1.5 percent, and France's CAC-40 was up 1.5 percent.

Reuters and the Associated Press contributed to this report.