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.

LIBOR for 3-month dollar loans rose to 4.05% from 3.88% on Monday. LIBOR for 3-month euro loans, meanwhile, rose to 5.27%, from 5.22% Monday.

President Bush again called for action on a financial rescue package early Tuesday. "I'm disappointed by the outcome (of the rescue plan) but I want to assure our citizens, and citizens around the world, that this is not the end of the legislative process," he said Tuesday in a brief White House appearance.

"Our economy is depending on decisive action from the government. The sooner we address the problem, the sooner we can get back on the path of growth and job creation," Bush said.

Light, sweet crude rose $4.27 to settle at $100.64 on the New York Mercantile Exchange. Oil fell more than $10 a barrel Monday as investors worried that a weaker economy would curtail demand.

While investors focused on what might come from Washington this week, Wall Street was cheered by several economic readings.

A private research group reported that consumer confidence rose unexpectedly in September. The Conference Board said Tuesday its consumer confidence index rose to 59.8 from a revised 58.5 in August; Wall Street had expected a reading of 55.5, according to Thomson/IFR. The reading, which doesn't reflect attitudes following Monday's steep stock market sell-off, remains near a 16-year low.

The Chicago Purchasing Managers' index, which measures business conditions across Illinois, Michigan and Indiana, came in at 56.7 compared with 57.9 in August — a second straight month of a strong reading.

European stocks finished mostly higher after an early decline on hopes Bush would successfully push for the package to be reconsidered.

Britain's benchmark stock index, the FTSE 100, closed up 1.7% after falling as much as 3% earlier in the day. Germany's benchmark DAX index rose 0.4%, while the Paris CAC-40 was up 2.0%.

Russia's regulator, meanwhile, was forced to halt regular trading for two hours in its two major markets on Tuesday morning after stocks plunged in the opening minute of trading. But shares recovered and closed up for the day.

In Ireland, the volatility was massively upward, as the government guaranteed all the deposits and borrowings — worth around 500 billion euros ($717 billion) — of six of the country's major lenders. Ireland's ISEF Index of financial shares surged as much as 25% on the back of the guarantee, before settling to a rise of 7.9%.

Some analysts were crediting Ireland's unprecedented move with helping to keep European stocks overall from falling nearly as much as stocks in the U.S. and Asia had.

"The Irish government's blanket insurance could form a template for a European approach to this crisis," said Rob Carnell, London-based chief international economist at ING Financial Markets.

"The credit markets really need a U.S. bailout deal to go through," said Richard Hunter, head of British equities at Hargreaves Lansdown Stockbrokers. "The alternative is unacceptable."

Like the U.S., Latin American stocks regained ground Tuesday after steep losses. Still, gains didn't come close to erasing Monday's markets carnage.

Stocks plummeted across Asia in panic selling.

Japan's benchmark Nikkei 225 index fell 483.75 poins, or 4.1%, to 11,259.86, its lowest level in more than three years.

Hong Kong's Hang Seng Index plunged as much as 6% but recovered to end up 0.76%. In the South Korean capital Seoul, the Kospi index lost 3.5%.

Asian markets had fallen Monday, unimpressed by the bailout package engineered over the weekend by Treasury Secretary Henry Paulson and congressional leaders. But they were even more dismayed Tuesday by the possibility there might be no deal at all — or a long delay. Asians are worried about continuing financial turmoil and a U.S. recession, which would smother demand for Asian exports.

In an online analysis of the Asian market reaction Tuesday, Moody's Economy.com blamed Congress for "destroying hopes that the global financial market turmoil would soon come to an end … The longer it takes for a rescue package to take effect in the market, the more severe the U.S. recession will be."

"This is a hint of what will happen if they don't pass a rescue," said Song Seng Wun, regional economist at the CIMB-GK investment firm in Singapore. "It could be 10 times worse."

He predicts Congress will come through with a bailout that holds "Wall Street more accountable … Fat cats will be made to pay more for their excesses.

"Something will be passed."