The market was able to shrug off data showing consumer confidence falling to an all-time survey low and further declines in US home prices.
The Dow Jones Industrial Average vaulted 185.66 points to 8669.59 at the closing bell as a rally gathered momentum late in the day.
The tech-dominated Nasdaq rose 40.38 points to 1550.70 and the broad Standard & Poor's 500 index jumped 20.99 points to a preliminary close of 890.41.
Market action came after the US Treasury said it was injecting $US5 billion ($7.2 billion) into auto finance firm GMAC and lending another $US1 billion to General Motors in a move to help stimulate auto loans to boost sales in the sagging sector.
"These developments will substantially ease the upward pressure that we have seen on auto loan borrowing spreads, and provide greater access to auto loan credit for American households,'' said Brian Bethune at IHS Global Insight.
"The landmark deal announced today is indeed groundbreaking in terms of the scale of the response of the Treasury and the Federal Reserve to the economic and financial crisis that has enveloped the US economy.''
The market paid little heed to a Standard & Poor's/Case Shiller survey showing a record 18 per cent drop in home prices in the largest US cities, and a Conference Board survey showing its consumer confidence index falling to 38.0, the weakest on record.
"It is a bit odd that when both consumer confidence and housing prices hit levels of virtual collapse the market does little other than move up,'' said Douglas McIntyre at 24/7 Wall Street, a financial website.
"The only plausible explanation for the market's indifference is the idea that all the bad news is already priced into equities.''
Other global markets were also mainly higher as some closed out trading for the year.
In thin trading, the CAC 40 index in Paris soared 2.76 per cent to 3217.13, Frankfurt's DAX rose 2.24 per cent to 4810.20 and the FTSE 100 in London jumped 1.70 per cent to 4392.68.
Japanese shares managed a gain of 1.28 per cent on the final trading day, unable to avert the worst yearly performance ever for the benchmark Nikkei index, which fell 42.12 per cent for 2008.
Spain's Ibex-35 index also suffered its worst-ever result, plunging 39.43 per cent in the past 12 months. The Dax index in Frankfurt also fell 40.4 per cent in 2008 and Milan's Mib index plunged 49.52 per cent over the year.
On Wall Street, which has a shortened session on Wednesday, the Dow is down 34.65 per cent for the year, which would mark the worst yearly performance since 1931. The S&P 500 is off 39.34 percent, the worst since its creation in 1957, and the Nasdaq down 41.53 per cent, the steepest loss since it was created in 1971.
Among stocks in focus on Wall Street, GM rallied 5.56 per cent to $3.80 as the car giant announced new, low finance rates with GMAC, which also loosened some credit restrictions to help boost sales.
Ford added 3.15 per cent to $2.29.
Dow Chemical increased 1.5 per cent to $15.55 after steep losses on Monday following downgrades of its credit rating from Standard and Poor's and Moody's linked to a scrapping of a joint venture plan with Kuwait.
Bonds firmed. The yield on the 10-year US Treasury bond eased to 2.087 per cent from 2.096 per cent on Monday and that on the 30-year bond fell to 2.583 per cent from 2.625 per cent.
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