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The Commerce Department said durable goods orders surged 4 percent after a revised 1.3 percent drop in June, which was previously reported as a 1.9 percent fall.

Economists polled by Reuters had expected orders to rise 2 percent last month. Orders were buoyed by a 14.6 percent jump in bookings for transportation equipment, which was the largest increase since January.

Excluding transportation, orders unexpectedly rose 0.7 percent after gaining 0.6 percent in June. Economists had expected this category to fall 0.5 percent.

But non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending, fell 1.5 percent last month after a revised 0.6 percent rise in June.

Economists had expected a 1 percent fall from a previously reported 0.4 percent gain.

The decline in business spending plans, coming on the heels of weak readings on regional factory activity so far this month, could add to fears that the manufacturing sector is running out of steam.

However, this business spending plans category normally weakens in the first month of each quarter in part because of an incomplete seasonal adjustment of the power equipment subcomponent.

Manufacturing has supported the economy's recovery. However, a plunge in share prices has hit both business and consumer confidence. Regional Federal Reserve factory surveys so far for August have been sharply weaker.

Last month, durable goods orders were buoyed by a 43.4 percent surge in aircraft orders, which erased June's 24 percent slump. Boeing received 115 aircraft orders, up from 48 in June, according to information posted on the plane maker's website.

Motor vehicle orders jumped 11.5 percent, the largest increase since January 2003, after edging up 0.1 percent the previous month, indicating a fading of the supply chain disruptions from Japan.

Outside of transportation, details of the report were mixed, with orders for machinery and computers and electronic products falling. However, orders for primary metals, and capital goods rose.

Shipments of non-defense capital goods orders excluding aircraft, which go into the calculation of gross domestic product, edged up 0.2 percent after rising 1.9 percent in June.

(Reporting by Lucia Mutikani; Editing by Neil Stempleman)

The global miner also sought to appease investors with a big hike in its dividend.

BHP, the last of the major miners to report results, was confident on the outlook for commodity prices despite expecting weak growth in Europe and the United States.

"We expect robust demand in the short and medium term, supported by commodities intensive emerging economic growth," the company said.

However, it joined its peers in warning costs were rapidly rising.

"In the current environment, tight labor and raw material markets are presenting a challenge for all operators, and BHP Billiton is not immune from that trend," the company said.

It raised its dividend by 22 percent, which it said reflected its "confidence in the long term outlook for our core commodity markets," after completing a $10 billion share buyback earlier than planned.

Investors had been divided over whether to expect another buyback following BHP's recent $12.1 billion bid for U.S. shale gas producer Petrohawk Energy, its biggest successful deal since BHP took over Billiton Plc.

Soaring prices for iron ore, copper and oil boosted attributable profit before exceptional items to $10.98 billion for the six months to June from $6.77 billion a year ago, missing an average forecast of $11.7 billion, according to Thomson Reuters I/B/E/S.

Earnings from iron ore, its biggest division, jumped 122 percent to $13.3 billion, while earnings for base metals soared 47 percent and petroleum earnings grew 38 percent.

It said inflation and the falling U.S. dollar cut underlying earnings by $3.2 billion.

BHP's shares have fallen 16 percent so far this year on worries about global growth, underperforming the broader market's .AXJO 14 percent drop. The miner's shares ended flat at A$38.21, shortly after the result was released, in line with the market.

(Reporting by Sonali Paul; Editing by Ed Davies)

Japanese assets showed a muted reaction to a downgrade of Tokyo's government debt by ratings agency Moody's, while the dollar fell slightly versus the yen after Japan unveiled a $100 billion credit line to help companies deal with the impact of a strong currency but shied away from intervening in the markets.

Gold climbed more than 1 percent, after tumbling from a record high on Tuesday as investors switched money back into shares, propelling U.S. stocks up around 3 percent.

Wall Street's rally, perversely, was driven by more dismal U.S. economic data, which raised expectations that Federal Reserve Chairman Ben Bernanke will use a speech on Friday at a central bankers' conference in Jackson Hole, Wyoming, to signal a fresh monetary offensive to fend off a renewed recession.

Euro STOXX 50 futures rose 0.9 percent, Germany's DAX futures were up 0.9 percent and France's CAC futures up 0.6 percent, while financial bookmakers called London's FTSE 100 to open as much as 0.8 percent higher.

Last year, Bernanke used the Jackson Hole meet to prepare the ground for the Fed's second round of quantitative easing, a $600 billion bond-buying program designed to pump cash and confidence into financial markets that became known as "QE2."

"The market is becoming more pessimistic about the economic outlook and is responding by pricing in a greater chance of QE3," said Bricklin Dwyer, economist at BNP Paribas, in a client note.

But while Bernanke is expected to acknowledge his disappointment over the pace of growth in the economy, many Fed watchers say the chances of a major new bond buying operation being announced at Jackson Hole are limited.

"I think we'll see (QE3) because America needs growth, but I don't think we'll necessarily get it on Friday," said Neil Dwane, chief investment officer for Europe at RCM.

RECESSION FEARS

Asian shares opened higher but swiftly retreated into negative territory, with Japan's Nikkei share average falling 1.1 percent, while MSCI's broadest index of Asia Pacific shares outside Japan lost 0.8 percent.

S&P 500 futures fell 0.9 percent, suggesting Wall Street's rebound may be coming to a halt for now.

World stocks have tumbled this month on fears the United States is slipping back into recession and as Europe's sovereign debt crisis worsens.

The MSCI index remains down 14 percent for the month so far, and about 18 percent below is April high.

Moody's announced shortly before Asian markets opened that it was cutting Japan's credit rating by one notch to Aa3, mirroring an earlier downgrade by rival S&P, blaming large budget deficits and a buildup of debt since the global recession of 2009.

"It's been a while since Japan lost its triple-A status, so it is unlikely that Japan's interest rates will rise sharply," said Fumiyuki Takahashi, managing director at Barclays Capital.

The dollar quickly came off an intraday high of 76.88 yen, and was trading slightly down on the day around 76.60 after Japan's statement on the yen.

Tokyo's new credit line will facilitate firms' acquisitions overseas and their procurement of energy and resources from abroad, but analysts were skeptical the measures would calm markets after the yen hit a record high of 75.941 last week.

"The scheme treats the symptoms not the underlying cause," said Todd Elmer, currency strategist at Citi in Singapore.

Japanese government bond September 10-year futures fell initially after the Moody's announcement, but reversed course as equities slipped to trade up 0.18 point at 142.73, and the benchmark 10-year yield dipped 0.5 basis point to 1.005 percent.

Japanese government bonds are insulated by the fact that the vast majority of Tokyo's debt pile is domestically held.

"JGBs have tended not to show any lasting reaction to ratings downgrades in the past -- probably because in Japan the problem if anything is one of over-saving, which banks recycle into JGBs, which remain 'risk free assets'," said Naomi Fink, head of Japan strategy at Jeffries Japan.

Gold was up about 1 percent just below $1,850 an ounce, after suffering its biggest one-day fall in 18 months on Tuesday. Gold's safe-haven appeal has driven it to a series of records in recent months.

U.S. crude oil, which has tended to follow equities in recent months, fell 0.2 percent to $85.30 a barrel.

(Additional reporting by Ian Chua in Sydney; Editing by Richard Borsuk and Ramya Venugopal)

Weak data in housing and regional factory activity triggered the latest round of bets that Bernanke will act, even though the Fed's options appear limited. Bernanke speaks to a central bank conference on Friday in Jackson Hole, Wyoming.

"I don't think anybody wants to be too short or negative in front of Bernanke's speech," said Jim Awad, managing director at Zephyr Management in New York.

The Dow Jones industrial average was up 322.11 points, or 2.97 percent, at 11,176.76. The Standard & Poor's 500 Index was up 38.53 points, or 3.43 percent, at 1,162.35. The Nasdaq Composite Index was up 100.68 points, or 4.29 percent, at 2,446.06.

Technology and other growth stocks drove much of the gains, with the Nasdaq rising more than 4 percent. The sharp rise echoed the wild swings the market experienced two weeks ago after Standard & Poor's downgraded United States' long-term credit.

Volume was a solid 9.35 billion shares traded on the New York Stock Exchange, the American Stock Exchange and Nasdaq. The daily average for last year was about 8.47 billion.

Even financials, which had been knocked lower earlier by shares of Bank of America, ended positive, with the S&P Financials Index up 3.2 percent.

Bank of America Corp remained under pressure on fears of possible write-offs and the need for capital. Its stock fell 1.9 percent to $6.30 but well off the day's lows.

More than 561 million shares traded in Bank of America, accounting for nearly 6 percent of overall composite volume for the exchanges.

The market has been battered by concerns of another U.S. recession and the worsening euro zone debt crisis.

"This is how the start of a rally in an oversold market usually looks like: an aggressive short-term gain like today," said Jack De Gan, chief investment officer at Harbor Advisory Corp in Portsmouth, New Hampshire, suggesting the market may have hit the bottom.

The rally briefly stalled in the afternoon on news of a magnitude of 5.9 earthquake, which struck in Virginia and forced some building evacuations along the U.S. East Coast and Canada, but no major damage or injuries were reported.

Big percentage gainers on the S&P included technology shares Nvidia Corp and JDS Uniphase Corp, both rising about 10 percent.

Among financial stocks, American Express Co and JPMorgan Chase & Co were the top gainers on the Dow. American Express shares rose 4.1 percent to $46.42, while JPMorgan shares advanced 4.1 percent to $34.78.

On the NYSE, advancers beat decliners by a ratio of about six to one, while on the Nasdaq, about five stocks rose for every one that fell.

(Reporting by Angela Moon, Editing by Kenneth Barry)