Stocks rally as investors hope for a new bailout bill; Dow up almost 500

— -- Stocks rebounded Tuesday, a day after the markets suffered a historic sell-off, on growing expectations that lawmakers will salvage a $700 billion rescue plan for the financial sector. But the seized-up credit markets where businesses turn to raise money showed little sign of relief.

The Dow Jones industrial average rose almost 500 points, helping to repair some of the Dow's 778-point decline Monday following Congress' rejection of a plan to mend the financial sector.

Investors are hopeful Congress will resume talks and craft a bill to help smooth out the financial system's problems resulting from bad mortgage loans and falling home prices, says Michael Holland of Holland & Co. "The market is betting Congress will come through with something for Friday," he says.

The Dow surged 485.21, or 4.7%, to 10,850.66, after falling nearly 7% on Monday to its lowest close in nearly three years. It was the largest point drop and 17th largest percentage drop in the blue chip index.

Technology stocks rose, too, helping to ease some of the pain from Monday's painful decline. The Nasdaq composte index jumped 98.60, or 5.0%, to 2,082.33. And boosted by a nearly 50% gain by the thrifts & mortgage finance companies in the index, the Standard & Poor's 500 gained 58.32, or 5.3%, to 1,164.74.

Some of the sheer panic in the bond market eased slightly, although conditions are still strained. Investors sold the three-month Treasury bill, a favorite investment among the most jittery investors, to push the yield to 0.89% from 0.14% late Monday.

The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 3.83% from 3.58% late Monday. The dollar rose against other major currencies and gold prices advanced.

The benchmark London Interbank Offered Rate, or LIBOR, that banks charge to lend to one another, rose sharply Tuesday, making it more expensive and difficult for consumers and businesses to borrow money. In addition, credit card debt and more than half of adjustable-rate mortgages are tied to LIBOR, so an increase isn't welcome for many consumers.