Stocks turned sharply higher Monday just ahead of Tuesday's Federal Reserve meeting, after a sharp drop at the end of last week on mounting concerns about the stability of the credit markets.

The Dow erased Friday's losses, and had its biggest daily percentage advance since June 2003.

The Dow Jones industrial average jumped 286.87 points, or 2.18 percent, to end at 13,468.78. The Standard & Poor's 500 Index climbed 34.61 points, or 2.42 percent, to 1,467.67. The Nasdaq Composite Index advanced 36.08 points, or 1.44 percent, to 2,547.33.

Stocks also got a boost from speculation the Federal Reserve may take steps to reassure investors that troubles in the subprime mortgage market won't slow economic growth. The Federal Open Market Committee is expected to leave interest rates unchanged at its meeting on Tuesday, but special attention will be payed to the accompanying statement.

Wells Fargo & Co. (WFC) announced the buyback of another 50 million shares, while Merrill Lynch's (MER) stock was upgraded by UBS AG, which said the stock's price already reflects risks the company faces in the mortgage market.

Shares of Bear Stearns Cos. (BSC) rose 5 percent after a Standard & Poor's analyst said the market's response to the ratings agency's recent outlook change to negative was a "vast overreaction."

"People feel like there's some confidence being restored in the debt markets," said Stephen Massocca, co-chief executive of San Francisco-based investment bank Pacific Growth Equities, noting Wells Fargo's buyback and other financial sector news.

"The rubber band was pretty stretched on the way down. A lot of things were very oversold, and there was considerable short interest," he said.

Volume was high, with about 2.29 billion shares changing hands on the New York Stock Exchange, above last year's daily average of 1.84 billion. On the Nasdaq, about 2.80 billion shares were traded, above last year's daily average of 2.02 billion.

Advancers outnumbered decliners on the NYSE by a ratio of 6 to 5, while on the Nasdaq, the trend was the opposite — with eight stocks down for every seven that rose.

Shares of home funding companies Fannie Mae and Freddie Mac rose on speculation that regulatory restrictions limiting the size of their portfolios might be lifted. Shares of Fannie Mae shot up 10.4 percent to $62.50, while Freddie Mac's stock jumped 7.7 percent to $60.

Shares of Bear Stearns gained $5.46, or 5 percent, to $113.81, while shares of Wells Fargo rose 5.9 percent, or $1.95, to $34.76. Shares of Merrill advanced 6.4 percent, or $4.50, to $74.55.

At Friday's close, financial shares were down 12.7 percent for the year to date.

Bear Stearns' stock was down in early trading, amid jitters after Friday's losses — the worst for any single day since Feb. 27 — on escalating fears of a credit squeeze. A top executive at Bear Stearns said last Friday that conditions in the credit market were the worst he'd seen in his 22 years in the business.

A drop of 4.5 percent drop in the price of oil depressed some energy companies' stocks, but eased worries about the effect of higher gasoline prices on consumer spending.