US stock markets rallied on Monday as upbeat data on consumer spending lifted hopes that economic growth would pick up speed, while Hurricane Irene caused less damage than feared.

The Dow Jones Industrial Average was up 254.71 points (2.26 percent) to close at 11,539.25.

The broader S&P 500 surged 33.28 points (2.83 percent) to 1,210.08, while the tech-heavy Nasdaq Composite shot up 82.26 points (3.32 percent) to 2,562.11.

The US Commerce Department reported that consumer spending, a pillar of the world's largest economy, rebounded 0.8 percent in July, after a 0.1 percent dip in June.

"The consumer is still out there spending, which set a very nice tone for the third quarter," said Lindsey Piegza, an analyst with FTN Financial.

She added: "We had a much better-than-expected scenario in terms of the hurricane hitting the East Coast. There was minimum damage, we are already seeing the debris moved away and transportation is back up and running."

Investors also got an unexpected dose of positive news from Europe, where the sovereign debt crisis has been weighing on market sentiment.

Two Greek banks, Alpha Bank and Eurobank, announced that they were merging and receiving a sizable Qatari investment, the first bit of good news from Greece's banking sector for some time.

Financial stocks rallied. Bank of America surged 8.1 percent after saying that it would sell half of its stake in China Construction Bank for about $8.3 billion, a move that will help BofA shore up its capital base and ease investor concerns about its health.

Citgroup gained 4.9 percent, while JPMorgan Chase was up 4.0 percent and Goldman Sachs was up 3.9 percent.

Insurance giant Travelers closed the day with a gain of 5.1 percent as fears subsided that multibillion-dollar damages from Irene would strain insurers' balance sheets.

Airlines soared. American Airlines rose 8.6 percent, Delta Air Lines was up 5.3 percent and United Continental gained 3.7 percent.

Last week, some risk-assessment firms predicted that Irene would cause up to $20 billion in total damages in the United States, but by Monday the same companies were putting the figure at about $7 billion.

Amazon gained 3.6 percent after technology research firm Forrester predicted strong sales for the company's upcoming tablet computer and described it as a formidable competitor to Apple's iPad.

Bond prices slumped. The yield on the 10-year Treasury note grew to 2.27 percent from 2.19 percent late Friday, while that on the 30-year bond increased to 3.62 percent from 3.53 percent.

Bond prices and yields move in opposite directions.