The Nasdaq Composite also rose to its best level since May.

The Dow industrials rose 123.27 points, or 1.1% to 11,850.61. The benchmark index easily surpassed its previous all-time intraday high of 11,750.28 reached on Jan. 14, 2000.

The Nasdaq Composite Index was up 47.30 points, or 2.1% at 2,290.95, while the S&P 500 Index gained 16.11 points, or 1.2% to 1,350.22. The broad gauge is now at levels not seen since February 2001.

"Equity market gains have been fueled by a drop in energy prices and interest rates," said Michael Sheldon, chief market strategist at Spencer Clarke, referring to the precipitous decline in the price of oil over the last two months and the drop in the yield on the benchmark Treasury 10-year note.

"And investors are increasingly optimistic that the Fed will orchestrate its famed soft landing."

A soft landing happens when an economy slows after a period of strong growth but remains robust enough to create jobs and maintain corporate profits. A hard landing is when an economy tumbles into recession after growing strongly for some time.

Investors have been worried that the Federal Reserve went too far in raising interest rates as it sought to choke inflationary pressures by slowing economic growth. The central bank raised its key short-term rates over a period of two years to 5.25% before deciding to pause at its monetary policy meeting in August. Raising interest rates lifts the cost of borrowing, acting as a brake on consumer spending and on corporate investment.

Sheldon said Wednesday's gains are partly the result of heavy buying from those investors who "have missed out on the recent rally." He said much of the buying has benefited blue-chip companies and other large-cap stocks.

"In the past, when market leadership is concentrated in just a few names, this has not been a healthy development," said Sheldon. "Therefore, it will be important for market leadership to broaden out and include other industry groups such as the transportation stocks and small caps, which have lagged the market in recent days."

Adding to positive sentiment on the market, Federal Chairman Ben Bernanke offered some soothing remarks on the weakening housing market.

Although he expects the housing slump to cut into second-half economic growth, strong underpinnings may limit the duration of the "substantial correction" underway.

These underpinnings include a good job market, strong income growth, demographics and continued low mortgage rates," he said in a speech on public policy challenges from the aging U.S. population to a business group in Washington. See full story.

On the broader market for equities, advancers led decliners by more than 3 to 1 on the New York Stock Exchange and by more than 2 to 1 on the Nasdaq.