Dow ends up 78: Stocks off of earlier highs after euro deal

— -- Stocks closed modestly higher Monday after a reported threat to Germany's credit rating deflated a morning market rally. The Dow Jones industrial average closed up 78 points, giving back much of a 167-point gain from earlier.

The Dow Jones industrial average rose 0.7%, to 12,097.83.

The S&P 500 rose 13, or 1%, to 1,257. The Nasdaq rose 29, or 1.1%, to 2,656.

News reports Monday afternoon said Standard & Poor's will put all nations that use the euro on "creditwatch negative," meaning there is a 50-50 chance of a downgrade in the coming months. S&P had warned of possible rating demotions for many of the countries. But the inclusion on the list of Germany, Europe's strongest economy, came as a surprise.

Stocks had risen strongly in the morning after the leaders of France and Germany called for a new treaty to impose greater fiscal discipline on European countries. Yields on Italian government bonds receded sharply after the new government of Mario Monti introduced sweeping austerity measures over the weekend. That suggests that traders believe Italy is less likely to default.

"There's pent-up demand, and people will use any excuse to get back in, thinking there's been too much pessimism," said Brian Gendreau investment strategist with Cetera Financial Group. Despite strong signals about the U.S. economy, the market has been weighed down by negative headlines about the U.S. budget impasse, credit-rating downgrades of the U.S. and other nations, and Europe's spreading crisis, Gendreau said.

Investors are hoping that a summit of European leaders this Friday will produce concrete measures to prevent a messy breakup of the euro currency, which is shared by 17 nations. Markets have been jittery because of fears that the euro might disintegrate, causing a sharp recession in Europe that would spread through the world economy.

While the statements from French President Nicolas Sarkozy and German Chancellor Angela Merkel were far from a long-term solution, investors are eager to buy on any hint of good news because they have been earning meager returns from relatively low-risk investments such as Treasurys and CDs, said Brian Gendreau, investment strategist with Cetera Financial Group.

The gains were broad. All 10 industry groups in the S&P 500 rose. Financials stocks were among the biggest winners. Investors have feared that U.S. banks might be dragged down by their close connections to the unstable European financial system.

Investors are hoping that a summit of European leaders on Thursday and Friday will produce concrete measures to prevent a messy breakup of the euro currency, which is shared by 17 nations. Markets have been jittery because of fears that the euro might disintegrate, causing a sharp recession in Europe that would spread through the world economy.

While the statements from French President Nicolas Sarkozy and German Chancellor Angela Merkel were far from a long-term solution, investors are eager to buy on any hint of good news because they have been earning meager returns from relatively low-risk investments such as Treasurys and CDs, Gendreau said.