Stocks rebounded from two days of sharp losses on Wednesday after the Federal Reserve said it is prepared to do more for the economy if conditions warrant, helping to stanch the panicky reaction to Europe's debt crisis.

Trading volume was light, however, possibly signaling that worries about Greece hold greater sway than the Fed at this time. Investors sold heavily this week after Greece said it would hold a referendum on an EU bailout crucial to stabilizing the euro zone's financial system.

Federal Reserve Chairman Ben Bernanke said the central bank was closely monitoring developments in Europe and left open the possibility that the Fed could expand its holdings of mortgage debt if U.S. economic conditions worsened.

Bernanke was clear that they were prepared to do more, that they have the tools to do more, said Tim Ghriskey, chief investment officer of Solaris Asset Management in Bedford Hills, New York. We remain in a very volatile situation.

The energy and financial sectors were among the strongest performers on Wednesday after having led the market lower the previous two sessions. The S&P energy index rose 2.9 percent while the financial index rose 2.8 percent.

Some 7.5 billion shares were traded on the NYSE, the Amex and Nasdaq, which was nearly 10 percent below the 20-day moving average and well below Tuesday's high volume selloff when over 10 billion shares changed hands.

There's no volume, which means there's no conviction in the move; the market remains 100 percent macro driven, and any news out of Europe could still shift markets, said Eric Lichtenstein, managing director at Knight Capital in Jersey City, New Jersey,

The Dow Jones industrial average rose 178.08 points, or 1.53 percent, at 11,836.04. The Standard & Poor's 500 Index gained 19.62 points, or 1.61 percent, at 1,237.90. The Nasdaq Composite Index added 33.02 points, or 1.27 percent, at 2,639.98.

Also helping Wednesday's market gains, data showed U.S. private employers added more jobs than expected last month, continuing a recent pattern of better-than-expected economic data.

Conditions in Europe remained a wild card as sources told Reuters the EU and IMF will not release an 8 billion euro payment to Greece until after the country has held its referendum, which could happen in December.

Among advancing stocks, Citigroup Inc gained 2.3 percent to $29.83 and JPMorgan Chase & Co added 2.8 percent to $33.64. The KBW Bank index climbed 3.3 percent.

The CBOE volatility index eased after gaining more than 40 percent over the past two sessions to hit its highest in a month. On Wednesday it fell 5.8 percent to 32.74.

Despite a decline in the VIX index, often called Wall Street's fear gauge, it is still about 16 percent above fair value and is likely to remain elevated as traders struggle to price Greek referendum risk, Credit Suisse said in a research note.

The furious VIX perturbation and gyrations observed over the last two days can basically be distilled down to the following takeaway: equity investors don't know how to price referendum risk, said Credit Suisse in a research note.

MasterCard Inc shares jumped 7 percent to $357.66 after the credit card processor reported its quarterly profit easily beat estimates on double-digit increases in volumes.

(Reporting by Edward Krudy; Additional reporting by Ryan Vlastelica; Editing by Kenneth Barry)