The Dow and S&P 500 closed at their highest levels since June 2008 on Tuesday and looked poised for more gains after strong earnings and signs of a surge in U.S. manufacturing.

Data showing improved factory activity and strong results from shipping company UPS Inc, seen as a gauge for economic activity, bolstered the growing impression among investors that a recovery was broadening.

The rising sentiment drew in additional buyers on a well-traded day as fears that Egypt's turmoil could spread elsewhere lessened.

Volume was above last's years daily average with 8.71 billion shares traded on the NYSE, Amex, and Nasdaq amid reports of some large scale buying from institutional investors.

The Dow closed above the psychologically important 12,000 level for the first time since June 2008.

Scott Marcouiller, chief technical market strategist at Wells Fargo Advisors in St. Louis, said the biggest pullback in six months on Friday had lured investors. There was an opportunity for that money that had missed out to jump in, he said.

The Dow Jones industrial average gained 148.23 points, or 1.25 percent, to 12,040.16. The Standard & Poor's 500 Index rose 21.45 points, or 1.67 percent, to 1,307.57. The Nasdaq Composite Index added 51.11 points, or 1.89 percent, to 2,751.19.

The S&P 500 closed above 1,300 for the first time since August 2008.

Risk is coming back into the market, said David Lutz, managing director of trading, Stifel Nicolaus Capital Markets, Baltimore. A lot of it is block volume which suggests it's institutional.

Pfizer Inc shares rose 5.5 percent to $19.22 after the Dow component's income and revenue topped estimates. The drugmaker also announced a new share-repurchase program of up to $5 billion of its common stock.

United Parcel Service Inc rose 4.1 percent to $74.59 after profit at the world's largest package deliverer beat estimates and it forecast record-high earnings in 2011.

Signaling improvement in economic growth, the U.S. manufacturing sector expanded at its fastest pace in nearly seven years in January, according to the Institute for Supply Management. The index's employment component rose to its highest since 1973.

That chimed with other manufacturing reports released around the world on Tuesday.

Manufacturing seems to clearly be an area of strength, and it is the combination of manufacturing picking up and the consumer picking up, that's most of the economy. said Eric Kuby, chief investment officer at North Star Investment Management Corp in Chicago.

The euro hit a 2-1/2 month high above $1.38, boosted by the solid global manufacturing data, as easing concerns about the euro-zone's public debt also helped the broad equity rally.

Investors were less jittery about Egypt.

President Hosni Mubarak, responding to huge popular protests demanding the end of his 30-year rule, said he would not seek re-election in a ballot scheduled for September.

The CBOE Volatility Index, Wall Street's fear gauge, fell nearly 10 percent, its biggest drop in over two months

Advancing stocks beating declining ones by a ratio of nearly 5 to 1 on the New York Stock Exchange.

NYMEX oil futures, which had risen in the past couple of days, fell 0.7 percent to $90.77 a barrel.

U.S. investors also continued to search for Egyptian markets exposure. The Van Eck Market Vectors Egypt Index exchange-trade fund was up 5.8 percent after a 7.9 percent jump Monday. The ETF is one of the main instruments for U.S. investors seeking exposure to Egyptian markets.

Supporting the Nasdaq, Baidu shares gained 9.3 percent to $118.73 after the company beat fourth-quarter estimates and painted a bright near-term outlook.

(Reporting by Edward Krudy, Additional reporting by Caroline Valetkevitch, Editing by Kenneth Barry)