U.S. stocks rallied Monday, the first day of the third quarter, boosted by a fresh round of takeover activity and data showing a pickup in manufacturing in June.

The Dow Jones industrial average shot up 126.81 points, or 0.95 percent, to end at 13,535.43. The Standard & Poor's 500 Index climbed 16.08 points, or 1.07 percent, to finish at 1,519.43. The Nasdaq Composite Index rose 29.07 points, or 1.12 percent, to close at 2,632.30.

Caterpillar Inc. (CAT) and United Technologies Corp. (UTX) led the Dow industrials higher after a surprising rise in the Institute for Supply Management's factory index to its highest level in more than a year.

Takeover activity showed few signs of abating despite concerns about tightening credit. Canada's largest telephone company, BCE Inc. , agreed to a US$32.6 billion buyout.

"With interest rates going down a little bit, we'll likely see some more of these M&A deals," said Alan Lancz, president of Alan B. Lancz & Associates Inc., a Toledo, Ohio-based investment advisory firm.

Trading was light on the New York Stock Exchange, with about 1.38 billion shares changing hands, well below last year's estimated daily average of 1.84 billion.

On the Nasdaq, about 1.84 billion shares traded, below last year's daily average of 2.02 billion.

Advancing stocks outnumbered declining ones by a ratio of nearly 4 to 1 on the NYSE and by almost 2 to 1 on Nasdaq.

The yield of the benchmark 10-year U.S. Treasury note dipped below 5 percent, further brightening the outlook for acquisitions that has fueled the spring rally in stocks. Lower interest rates make financing M&A transactions more feasible.

The benchmark 10-year U.S. Treasury note gained 8/32 in price, with the yield at 4.991 percent, the lowest level in more than four weeks.

Caterpillar's stock rose 2.8 percent to $80.45, while United Technologies gained 2.2 percent to $72.46, both in NYSE trading.

If completed, the buyout of Canada's BCE would be the world's largest, surpassing the still pending $31.8 billion buyout of Texas power company TXU (TXU) Corp.

U.S.-listed shares of BCE rose 4.4 percent to $39.45.

In other telecommunications deals, AT&T Inc. (T) said it will buy rural wireless communications services company Dobson Communications Corp. (DCEL) for $2.8 billion in cash. Dobson shares shot up 11.8 percent to $12.42 on the Nasdaq.

Shares of British cable operator Virgin Media Inc. (VMED) climbed 17.6 percent to $28.67 after the company said it had received a bid approach from an unnamed group. Virgin Media's stock ranked second among those contributing the most to the Nasdaq 100 index's gain.

Bank of New York Mellon rose 6.8 percent to $44.25 on the NYSE after the company announced the completion of the merger that combines Mellon Financial Corp. and The Bank of New York Co.

The news on the M&A front was not all rosy. Shares of Trump Entertainment Resorts tumbled after the Atlantic City casino operator said a buyout deal fizzled.

Trump shares slid nearly 17 percent to $10.49 on the Nasdaq.

Charles Schwab Corp. was one of the top movers in the S&P 500 after the discount brokerage firm said Monday that it is undertaking a $3.5 billion capital restructuring program, which will include a special dividend, a stock-buyback plan and debt offerings.

Schwab shares rose 7.2 percent to $22 on the Nasdaq. Bank of New York Mellon and Schwab helped drive the S&P Financial index up 1.2 percent.

Shares of BlackBerry maker Research In Motion Ltd. (RIMM) extended gains after news of stronger-than-expected quarterly results last week. RIM shares surged 7.1 percent to $214.26 after hitting a record $215.40 earlier in the session.