Stocks rebound on reports of 2nd euro bailout fund

Stocks rose in late-afternoon trading Tuesday on a report that European leaders might create a second bailout fund to supplement the one they have already agreed to.

Trading had been mixed for much of the day after Standard & Poor’s expanded its downgrade threat against Europe to include the existing bailout fund. The second fund would nearly double the capacity of Europe’s financial rescue programs, the Financial Times reported.

Standard & Poor’s warned late Monday that it might downgrade 15 countries that use the euro, even Germany, which has a perfect AAA rating and Europe’s strongest economy. On Tuesday, S&P said it might also cut the AAA rating of Europe’s bailout fund. The fund needs that top rating to cheaply raise money, and losing it would mean it would cost billions more to fund bailouts. European markets mostly fell on the news.

The Dow Jones industrial average rose 110 points, or 0.9 percent, to 12,208 at 3:15 p.m. Eastern time. Among its top performers was 3M Co., which rose 2.2 percent after the maker of Post-It notes forecast 2012 earnings that were stronger that many analysts expected.

The Standard & Poor’s 500 index rose 8 points, or 0.6 percent, to 1,265. The Nasdaq composite average rose 6, or 0.2 percent, to 2,662.

U.S. stock indexes have risen sharply from the lows they reached during a Thanksgiving-week drubbing. The S&P 500 is up 9.2 percent since Nov. 25, when it closed at 1,158.

Traders were looking ahead to a crucial summit of European leaders that wraps up Friday. They hope to see more concrete solutions to restore long-term confidence in the euro and rescue the region from the sovereign debt crisis that has roiled world markets for months.

“We are coming to a head in Europe, and it’s no longer about the small countries like Greece,” said Paul Zemsky, chief investment officer at ING Investment Management. He said current stock prices reflect traders’ expectations of a rate cut from the European Central Bank on Thursday and strong political action on Friday. Any less that, he said, and “it’s anyone’s guess show bad things will get, but they’ll get pretty bad.”

The S&P warning left out only two of 17 countries that use the euro: Cyprus, which already is being reviewed for a downgrade from near-junk status, and Greece, whose low ratings already suggest it is likely to default soon anyway. Skepticism over a new plan to prevent a breakup of the common currency also dragged markets lower.

S&P’s announcement halted a rally in European markets. It came just hours after the leaders of Germany and France unveiled a series of proposals, including punishing governments for overspending, that they hope will persuade the European Central Bank or the International Monetary Fund to lend the euro zone more support. Germany’s DAX index fell 1 percent, while France’s CAC-40 fell 0.4 percent.

The warning also clipped an advance on Wall Street late Monday. The Dow Jones industrial average finished with a gain of 78 points. It had been up 167 points before reports of the S&P action emerged.

S&P’s warning had little effect because traders believe the European crisis has crested, and things will improve slowly from this point, said Robert Tipp, chief investment strategist with Prudential Fixed Income, which has $325 billion under management. He pointed to borrowing costs for nations such as Italy, which have declined sharply in recent days after shooting to dangerously high levels a week ago.

“There’s going to be volatility going forward, and it’s going to be difficult for countries to follow their commitments, but I think you finally crossed that point where they took enough steps that the markets will get the message” there is a credible crisis-rescue plan in the works, Tipp said.

In corporate news:

? Darden Restaurants Inc. slid 11.9 percent, the most in the S&P 500 index, after the company slashed its profit forecast for 2012. The company is trying to turn around its struggling Olive Garden restaurant chain and cope with rapidly rising food costs.

? Alpha Natural Resources Inc. fell in early trading after the company agreed to pay more than $200 million to avoid being sued over a 2010 mine disaster that killed 29 men. The stock recovered as broader markets rallied in late-afternoon trading.