The Treasury Department's bad asset cleanup program would tap money from the government's $700 billion financial rescue fund and also involve help from the Federal Reserve, the Federal Deposit Insurance Corp. and the participation of private investors.
The government's announcement was what the market had waited weeks to hear. Treasury Secretary Timothy Geithner had announced an outline of the program last month but provided few details then about how it would work, leading to a poor reception in the markets.
Meanwhile, the housing report released Monday was overwhelmingly positive for the markets even though it showed a decline in home prices in February. Investors are embracing any sign that a glut in homes for sale may be easing.
The market had received another dose of housing good news last week on the troubled industry as housing starts for February came in much better than expected.
Collapsing home prices and the damage they have caused banks are at the center of the economy's current problems and are a major focus for the stock market. Banks have sharply curbed lending after becoming weighed down with loans that have gone bad, especially mortgages.
Investors had been largely disappointed in the government's efforts to date to restore the banks to health, but finally seemed encouraged by the long-awaited announcement Monday of details for the government's bad loan cleanup plan.
"The actions that we're getting from a policy standpoint are very helpful in removing the sand from the gears," said Alan Gayle, senior investment strategist at RidgeWorth Investments. "That is going to be good for the financials."
The plan seeks to draw in private investors, including big hedge funds, to participate by offering billions of dollars in low-interest loans to finance the purchases. The government will share the risks if the assets fall further in price.
Shares of the country's largest banks, which have been pounded in recent weeks over concerns about their ability to weather the crisis, soared on Monday. Citigroup Inc. jumped 17 percent, and Bank of America Corp. added 18 percent.
Even banks regarded as more sound posted big advances. JPMorgan Chase & Co. rose 18 percent, while Wells Fargo & Co. rose 17 percent.
In late afternoon trading, the Dow rose 405.06, or 5.6 percent, to 7,684.34.
Broader stock indicators also surged. The Standard & Poor's 500 index rose 42.34, or 5.5 percent, to 810.88, crossing the psychological milepost of 800. The Nasdaq composite index rose 42.34, or 5.5 percent, to 1,531.94.
The Russell 2000 index of smaller companies rose 24.79, or 6.2 percent, to 424.90.
More than 10 stocks rose for every one that fell on the New York Stock Exchange, where volume came to a moderate 1.14 billion shares.
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