Stocks rose on Tuesday as investors bet European leaders would take strong steps this week to end the region's debt crisis, including bolstering its financial rescue fund.

The latest source of optimism came from a Financial Times report that European leaders will discuss boosting the firepower of the euro zone's rescue fund at the summit. The report cited senior European officials.

At the summit on Thursday and Friday, France and Germany are expected to try to force changes to EU rules to impose mandatory penalties on countries that exceed deficit targets in hopes of restoring market confidence.

People are expecting something big and bold is going to get proposed so people are sanguine that something good is going to come out of this, said Stephen Massocca, managing director at Wedbush Morgan in San Francisco.

Optimism over Europe coming to grips with its debt crisis was reflected in a sharp slide of Italian and Spanish bond yields in recent sessions away from levels many see as unsustainable.

What you have to look at is where bonds are trading, so if the news isn't impacting peripheral European sovereign debt, if it's unaffected by the news, it's not going to affect equities, Massocca said.

Tuesday's gains came as investors shrugged off a warning from Standard & Poor's on Monday that it may cut the sovereign credit rating of 15 euro-zone countries. The rating agency threatened on Tuesday to cut the credit rating of the euro zone's financial rescue fund.

You throw in potential downgrades on 15 out of 17 European countries, and it is encouraging for the market to show this much resilience, said Ryan Detrick, senior technical strategist at Schaeffer's Investment Research, in Cincinnati.

The Dow Jones industrial average <.DJI> gained 52.30 points, or 0.43 percent, to 12,150.13. The Standard & Poor's 500 Index <.SPX><.INX> added 1.39 points, or 0.11 percent, to 1,258.47. But the Nasdaq Composite Index <.IXIC> dropped 6.20 points, or 0.23 percent, to 2,649.56.

In an interim report, European Council President Herman Van Rompuy told EU leaders tighter oversight of euro-zone fiscal policy can be achieved through minor rapid adjustments to the EU treaty.

General Electric Co was the Dow's top percentage gainer, climbing 2.4 percent to $16.72 after Bernstein upgraded the stock to outperform, citing strong financial fundamentals and expected dividend increases.

Fellow Dow component 3M Corp rose 1.5 percent to $82.13 after the diversified manufacturer forecast 2012 earnings and revenue largely in line with expectations as well as modest margin improvement.

AMR Corp jumped 67 percent to 70 cents after the bankrupt parent of American Airlines named Beverly Goulet, the carrier's treasurer, as the chief restructuring officer to oversee the Chapter 11 bankruptcy.

On the downside, Darden Restaurants Inc slumped 12.4 percent to $41.82 after it cut its fiscal 2012 earnings and sales forecast.

Volume was light with about 6.2 billion shares traded on the New York Stock Exchange, NYSE Amex and Nasdaq, below the daily average of 7.95 billion.

Advancing stocks slightly outnumbered declining ones on the NYSE by 1,498 to 1,476, while on the Nasdaq, decliners beat advancers by 1,405 to 1,079.

(Reporting By Chuck Mikolajczak; Editing by Jan Paschal)