New figures suggested American industry grew at a slightly slower pace in August than in July, trimming the odds that the Federal Reserve would increase rates at its next policy meeting.
But experts said the stock market would stay volatile this week, with figures for job creation and wage rates last month due to be published on Friday.
Traders returned from Monday's Labor Day holiday to send the Dow Jones industrials index soaring as much as 179 points, or 2.1 per cent, to 7,801 by mid-morning. This recovery dwarfed Friday's 72-point fall.
It also drew a line under the Dow's 7.3 per cent decline during August, the worst one-month performance since the outbreak of the Gulf War in August 1990. The upbeat start across the Atlantic helped the FTSE 100 index in London close 82 points higher at 4,951.9.
The monthly survey of industry by the National Association of Purchasing Managers, showing a slight drop in the pace at which US manufacturing is expanding, was given as the explanation for the post-holiday euphoria in the financial markets, even though economists cautioned that the survey also revealed worrying evidence of inflationary pressures.
The index of activity eased back to 56.8 from 58.6 in July. Output and new orders grew more slowly last month.
On the other hand, three other components of the overall index - employment, prices and delivery times - pointed to increased inflationary pressures. Manufacturers reported they were creating new jobs for the sixth month running, while delivery times, an indicator of supply bottlenecks, lengthened.
Jonathan Basile, an economist at HSBC Markets in New York, said this was one of Alan Greenspan's favourite inflation indicators: "It means a longer time for producers to deliver their goods to buyers. That translates into an imbalance that could spell inflationary pressure."
The survey's prices index picked up further in August after climbing above the 50 level in July, suggesting manufacturers have to pay more for materials. However, other economists said the strike at carriers UPS had increased delivery times. An increase in the price of Treasury bonds yesterday suggested the NAPM survey had relieved concerns about the outlook for interest rates.