U.S. stocks extended gains on Monday as investors cheered the Franco-German plan to rewrite the EU constitution for more central control of euro zone budgets.
The Dow Jones industrial average surged as much as 167 points before settling at 12,097.83, gaining 78.41 points, or 0.65 percent.
The Standard & Poor's 500 rose 12.80 points, or 1.03 percent, to 1,257.08. The Nasdaq Composite Index jumped 28.83 points, or 1.10 percent, to 2,655.76.
On Monday, French President Nicolas Sarkozy and German Chancellor Angela Merkel met in Paris, trying to reach common ground on measures to boost coercive budget discipline in the region. Investors were expecting the two leaders of the most important countries in the euro zone can iron out differences and come up with more radical solutions before a crucial European Union summit on Friday to the deteriorating debt crisis in the region.
At a joint press conference after the meeting, Merkel and Sarkozy said that the EU's two biggest economies were aligned on backing automatic penalties for deficit violators and locking limits on debt into euro members' constitutions.
However, the stocks rally faded in afternoon session after a Financial Times report said the Standard and Poor's would put six top-rated euro zone countries on negative credit watch, meaning there is a 50 percent chance of credit downgrades within the next 90 days.
Investors shrugged off a lackluster economic report, which showed the U.S. service sector, which employs 90 percent of the country's workforce, expanded at slower pace in November. The Institute for Supply Management said that its index of service sector activity dropped to 52 from 52.9 in October, as employment fell sharply.
Meanwhile, factory orders for the world's largest economy fell again in October, according to the U.S. Commerce Department.
After the stock market closed, Standard and Poor's put 15 eurozone nations, including the area's six AAA rated countries, on "CreditWatch negative" due to deepening economic and political turmoil in the region.
In its latest statement, S&P said "the CreditWatch placements are prompted by our belief that systemic stresses in the eurozone have risen in recent weeks to the extent that they now put downward pressure on the credit standing of the eurozone as a whole."