Stocks rose Wednesday as a slower-than-expected manufacturing report eased investors' worries about inflation, but a late-session rise in oil prices limited Wall Street's gains.

The Dow Jones industrial average (search) rose 81.58, or 0.8 percent, to 10,549.06, rising as much as 123.51 before giving up some of its gains as oil prices surged more than $2.60 per barrel. The Standard & Poor's 500 index (search) was up 10.72, or 0.90 percent, at 1,202.22. The Nasdaq composite index (search) climbed 19.64, or 1 percent, to 2,087.86.

Data from the Institute for Supply Management (search) indicated that the manufacturing sector is continuing to expand, albeit at a slower pace, and a component within the index that measures prices paid by purchasing managers suggested inflation remains in check. That, combined with an influx of capital amid questions about whether the proposed
European Union constitution would be approved, added up to good news for U.S. markets, said Hugh Johnson, chairman and chief investment officer of Johnson Illington Advisors.

"The Fed has told us they will continue to raise rates at a measured pace, but each decision will be made on the basis of existing or current conditions. And current conditions tell me that it's not a sure bet the Fed will raise rates at their June 30 meeting," Johnson said. "It's good news. But look: Whenever there's a lot of money chasing securities, prices are going to go up, and right now you have a lot of capital flowing in from Europe."

Trading on the New York Stock Exchange (search) was halted several minutes before the market closed due to communications problems.

Oil futures soared, climbing $2.63 to $54.60 on the New York Mercantile Exchange (search) on concerns that strong demand for diesel will leave it and other distillate fuels, including heating oil, in short supply later this year. Government inventory data, due Thursday, was also expected to influence trading.

Equities extended gains after the news that William Donaldson (search) plans to step down as chairman of the Securities and Exchange Commission.

"The market is reacting fairly positively to the news of Donaldson stepping down," said Evan Olsen, head of equity trading at Little Rock, Arkansas-based investment bank Stephens Inc.

Investors had been encouraged by remarks from Federal Reserve Bank of Dallas (search) President Richard Fisher (search), who told CNBC that the U.S. central bank has room to raise interest rates further but may be getting close to the end of its tightening cycle. Fisher is a member of the Fed's rate-setting Federal Open Market Committee.

Wall Street was disappointed in the Institute for Supply Management's (search ) manufacturing index reading for May, which came in at 51.4, lower than the 52 reading economists had expected. On the positive side, the prices paid index, a measure of inflation, fell to 58 in May from 71 in April.

"The ISM is slightly below, but I think the number that's significant here is that the prices paid number fell significantly. The market has been worried about inflation and it has been worried about the Fed and this relieves them on both fronts," said Milton Ezrati, senior economic strategist, Lord Abbett & Co.

Bonds continued to build on Tuesday's rally; the yield on the 10-year Treasury note dropped to 3.88 percent, from 3.98 percent late Tuesday. The euro slid to its lowest level against the dollar in eight months as voters in the Netherlands joined France in rejecting the EU constitution, putting any economic reforms it might bring on hold. Gold prices rose.

Another economic report showed a smaller-than-expected rise in construction spending. According to the Commerce Department (search ), construction spending rose 0.5 percent in April, on par with the 0.5 percent rise in March but less than the 0.6 percent rise expected on Wall Street.

Shares of Google Inc. (GOOG) climbed 3.6 percent, or $9.96, to $287.23, after analysts at Credit Suisse First Boston raised its target price for the stock to $350 per share from $275 per share. Piper Jaffray raised its target price for Google to $300 on Tuesday.

Delta Air Lines Inc. (DAL) was down 3 cents at $3.82 after the company said it renegotiated its credit agreement with General Electric Co.'s GE Capital division. The deal allows the airline to free up more money to cope with rising fuel prices.

SBC Communications Inc. (SBC) slid 10 cents to $23.28 after confirming it would offer high-speed Internet access for $14.95 per month for new residential subscribers — far lower than its competitors.

Telecommunications company Nortel Networks Inc. (NT) suffered a loss in the latest quarter due to restructuring charges. Nortel lost a penny per share, whereas Wall Street had expected the company to break even. Nortel stock nonetheless gained 9 cents to $2.68.

The Russell 2000 index of smaller companies was up 7.03, or 1.14 percent, at 623.74.

Overseas, Japan's Nikkei stock average rose 0.47 percent. In Europe, Britain's FTSE 100 was up 0.95 percent, France's CAC-40 climbed 1.40 percent and Germany's Xetra DAX gained 1.49 percent.

Reuters and the Associated Press contributed to this report.