NEW YORK (CNN/Money) - Stocks posted solid gains Wednesday as hopes that the Fed may be nearing the end of its rate-hiking campaign held sway over a late-day spike in oil prices.

The Dow Jones industrial average (up 82.39 to 10,549.87, Charts) ended the day up 0.8 percent after being up more than 1 percent earlier in the session.

The Nasdaq composite (up 19.22 to 2,087.86, Charts) index and the broader Standard & Poor's 500 (up 10.72 to 1,202.22, Charts) both added 0.9 percent, a shade off their highs for the session as well.

A mild reading on inflation and uncertainty overseas also fueled a Treasury market rally, lowering the yield on the 10-year note to 3.88 percent -- the lowest since April 2004 -- from 3.98 percent late Tuesday. Bond prices and yields move in opposite directions.

"It has been a solid performance, but there's still a healthy level of skepticism because stocks aren't cheap right now," said Hugh Johnson, consulting investment strategist at First Albany.

Major gauges soared earlier in the day when a report on the manufacturing sector -- the ISM index -- showed continued growth but not enough to spark inflation. Stock moved higher still after the president of the Dallas Federal Reserve said the central bank may soon end its rate hike campaign.

The rally lost steam when oil prices spiked late in the day, said Stephen Stanley, chief economist at RBS Greenwich Capital.

U.S. light crude for July delivery jumped $2.63 to close at $54.60 a barrel on the New York Mercantile Exchange, just below the five-week trading high of $54.70 hit late in the afternoon.

Analysts said investors would grow more cautious ahead of reports on labor costs, factory orders and initial jobless claims, all due Thursday, and the big report of the week -- Friday's government report on payroll growth and unemployment for May.

"Tomorrow, the market will probably continue upward driven by the dollar, but it won't go up much because of caution before the employment figures," said Johnson.

Payrolls are forecast up 175,000, but analysts said the whisper number is far below Wall Street forecasts, with some even predicting a shortfall.

Market breadth was positive, with advancers beating decliners three to one on the Dow as 1.4 billion shares changed hands. On the Nasdaq, advancers topped decliners by two to one as 1.8 billion shares were traded.

Markets rallied after the closely watched ISM index, a national survey of manufacturing activity, slowed more than expected in May. The pace of expansion was the slowest since June 2003 and key readings on employment and prices paid weakened.

"The ISM report was good news in two ways. There's a big difference between contraction and a slowdown; and the number still showed expansion," said Johnson.

"Moreover, the percentage of purchasing managers reporting paying higher prices declined sharply, showing there was little evidence of upward pricing pressure and inflation," he noted, adding that the report made it "no longer a certainty" that the Fed will raise its overnight lending rate target at each of its next three meetings.

Federal Reserve Bank of Dallas President Richard Fisher also told CNBC that the central bank may be nearing the end of its tightening cycle. Fisher is a member of the Fed's rate-setting Federal Open Market Committee.

In other economic news, April construction spending rose 0.5 percent, below economists' forecasts. Total spending hit a record seasonally adjusted annual rate of $1.066 trillion, the Commerce Department said.

The markets continued to get some direction from Europe after French voters Sunday rejected a new European Union constitution. The decision caused the French prime minister to resign Tuesday and sent the euro to a seven-month low against the dollar early in the week.

In currency trading, the dollar extended gains against the euro and the yen.

"One of the most important factors driving bonds, clearly, and stocks, less clearly, is the expectation that the euro will fall further," said Johnson. "It is attracting capital from European markets to the U.S."

On the Dow, 24 of 30 stocks ended the session higher.

The tech sector helped the advance, after Credit Suisse First Boston raised its target price for Google to $350 on a strong outlook for online advertising. The upgrade comes a day after Piper Jaffray raised its price target for the search engine's stock to $300.

Google (up $10.73 to $288.00, Research) shares added 3.6 percent, off their best levels of the session. Yahoo! (up $1.22 to $38.42, Research) and eBay (up $1.11 to $39.11, Research) shares rose in sympathy.

Isonics (up $0.44 to $3.54, Research) shares soared after the chip maker said it completed the first sales of its 300 millimeter silicon semiconductor wafers in May as projected.

Semiconductor heavy hitter Intel (up $0.33 to $27.29, Research) gained 1.4 percent and Applied Materials (up $0.20 to $16.62, Research) added 1.3 percent. The Philadelphia Semiconductor Index (up 3.16 to 432.11, Charts) was up 0.7 percent.

Meanwhile, Nortel Networks (up $0.20 to $2.79, Research) said it expects second-quarter revenue to grow by 4 percent to 6 percent over the same period last year, matching market expansion. Shares in the telecom equipment supplier ended the day up 7.7 percent.

"The tech rally has been in place since April 15," said Johnson. "It raises the question of whether tech is here to stay. But what we do know is that, combined with the rally in consumer cyclicals, the tech sector shows that the economy and profits will be solid through 2006."

Bear Stearns raised its rating on cereal maker General Mills (up $1.07 to $50.57, Research) to "outperform" from "market perform," and Kohl's (up $2.36 to $51.05, Research) shares rose after the retailer said sales at stores open at least a year rose 0.2 percent and backed its earnings outlook for the quarter.

On the other side of the ledger, luxury home builder Hovnanian Enterprises (down $1.33 to $60.77, Research) said income in the last quarter rose about 50 percent, driven by higher home prices and greater market penetration, but forecast earnings for the current quarter below analysts' estimates. The stock lost 2.2 percent.

COMEX gold fell $1.20 to $417.70 an ounce.