Stocks gained Thursday, after China's central bank cut lending and deposit rates, but the advance was capped as comments from Federal Reserve Chairman Ben Bernanke dimmed hopes for further stimulus measures.
Speculation had been increasing in markets that more monetary stimulus could be coming from policymakers here and abroad.
In his testimony to a congressional committee Thursday, Bernanke said the central bank was ready to take action if financial troubles increase, citing difficulties in Europe, but gave no hint of an imminent stimulus plan.
Stocks lost ground following the comments but were mostly higher in late afternoon. The surprising move by China's central bank to lower benchmark interest rates by 25 basis points eased worries about faltering global demand.
"China is again showing they are flexible in monetary policy and I think we'll continue to see that. China has proven they know when to get aggressive and they are doing it again, you are seeing the positive reaction to that," said Art Hogan, managing director of Lazard Capital Markets in New York.
The Dow Jones industrial average closed with a gain of 46 points, having rallied as much as 140 points in morning trading.
The rate cut in China, the world's No. 2 economy, also helped lift the stocks of U.S. companies linked to China's commodity-hungry industrial complex.
U.S. stocks jumped more than 2 percent on Wednesday, a third day of gains for the S&P 500. The index has rebounded since hitting its 200-day moving average, a key technical support level, on Friday and is now on track for its biggest weekly percentage gain of the year.
The S&P 500 is still well off its highs for the year.
Comments on Wednesday from Atlanta Fed President Dennis Lockhart and Federal Reserve Vice Chair Janet Yellen led investors to become more optimistic about the possibility of more stimulus from the Fed.
While Europe was still very much in the spotlight, stocks showed little reaction to a downgrade by Fitch in Spain's credit rating to 'BBB' with a negative outlook, just two notches away from junk status.
Germany's government and main opposition agreed on the outlines of a proposal for a European financial transaction tax, which could pave the way for parliament to approve a fiscal pact and permanent rescue plan for the euro zone.
Spain managed to raise more than 2 billion euros at a bond auction, tempering fears it is being cut off from financial markets, although it had to pay a heavy price to borrow the funds.
Reuters contributed to this report.
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