During early U.S. trade, the Dow Jones Industrial Average rose 1%, the S&P 500 index rallied 1.4%, while the Nasdaq Composite index jumped 1.3%.
Market sentiment was bolstered after U.S. Congressional leaders said talks with President Barack Obama on Friday to avert the fiscal cliff, a combination of automatic tax increases and spending cuts due to come into effect on January 1, were "constructive."
There are fears the U.S. economy will fall back into a recession, unless a divided Congress and the White House can work out a compromise in the six weeks left before the January deadline.
In earnings news, shares in home improvement retailer Lowe’s rallied 7% after reporting a 76% jump in third quarter net profit to USD368 million. Revenue during the period rose 1.9% to USD12.1 billion, above estimates for sales of USD11.9 billion.
The upbeat results prompted the company to boost its full-year earnings outlook.
Processed food giant Tyson Foods saw shares jump 6.6% after the company said fourth quarter net profit doubled to USD185 million from USD97 billion in the same period a year earlier.
U.S. listed shares of oil giant British Petroleum added 2.3% on news the company was planning to buy back USD5.9 billion of its shares after selling its stake in its Russian joint venture TNK-BP to Rosneft.
Other oil producers were also higher, with Exxon Mobil up 1.45%, Chevron gaining 1.9% and Royal Dutch Shell rising 1%.
Crude oil futures rallied more than 2% in U.S. morning trade on Monday, as escalating violence between Israel and Hamas militants in Gaza underlined concerns about a wider conflict that could disrupt supplies from the region.
Meanwhile, shares of tech giant Intel were halted for trade after news broke that its President and CEO Paul Otellini will retire in May.
Later in the day, the U.S. was to release an industry report on existing home sales.
Across the Atlantic, European stock markets were sharply higher, as hopes for a resolution on the U.S. fiscal cliff bolstered market sentiment.
The EURO STOXX 50 jumped 2%, France’s CAC 40 rose 2.1%, Germany's DAX rallied 2.15%, while Britain's FTSE 100 added 1.6%.
Investors looked ahead to a meeting of euro zone finance ministers on Tuesday to discuss unlocking Greece’s next tranche of financial aid.
During the Asian trading session, Hong Kong's Hang Seng Index rose 0.5%, while Japan’s Nikkei 225 Index surged 1.4%.
In Tokyo, the Nikkei rallied to a two-month closing high, boosted by ongoing weakness in the yen, which fell to a seven-month low against the U.S. dollar.