Stocks made their broadest, sharpest gains of August as the Federal Reserve offered calming words on the growth of the U.S. economy and Cisco Systems provided proof of strong corporate earnings.

The Dow Jones industrial average rose by 132.65 points, or 1.2 percent, to close at 10,787.80. The blue-chips gained momentum over the course of the session, breaking a recent pattern of starting strong only to sputter late in the day.

Broader stock indicators were also higher. The Standard & Poor's 500 rose 20.50, to 1301.93, and the Nasdaq composite index rose 74.87, to 2564.98, its biggest point gain since June 16.

Traders said the market was ripe for a minor rally after a slump that has left every major market index well below the lofty records reached in mid-July. But most Wall Street players said the advance was fragile. "This has been a nervous market and will continue to be for a while," said Barry Berman, head trader for Robert W. Baird & Co. in Milwaukee.

Many believe the market will have trouble sustaining gains at least until Aug. 24, when Fed policymakers hold their next meeting to set interest rates. Today the Fed offered some reassurance, saying its latest economic survey turned up little evidence of rising inflation.

But the Fed's "beige book" survey did note developments that could lead to increased inflationary pressures, most notably widespread labor shortages and scattered reports of higher prices. [Story, Page E3.]

The Fed, which raised rates slightly on June 30, has clearly signaled its willingness to raise short-term interest rates for a second time this year, hoping to prevent inflation from creeping into the robust U.S. economy.

Growing fears of a third rate increase this fall have hurt stocks and bonds alike. Plummeting bond prices in recent days have pushed up the yield on the 30-year Treasury bond closer to 6.25 percent, leaving long-term borrowing costs at the highest level in nearly two years. But bonds rallied after the Fed's report was released and on a strong auction response to the sale of 10-year Treasury notes. The price of the benchmark Treasury rose $4.38 per $1,000 invested, and its yield fell to 6.21 percent, from 6.24 percent late Tuesday.

For some investors, rising bond yields have presented an attractive alternative to returns on volatile stocks.

Cisco sparked buying today, rising 4-3/16, to 62-15/16. Late Tuesday, after markets closed, the company reported fourth-quarter earnings that beat analysts' estimates, rounding out a fiscal year in which revenue grew 43 percent and operating profits improved 35 percent.

America Online rose 7 3/8, to 92 3/8, after company executives held an upbeat conference call with analysts and major investors.

A wave of deals in the aluminum industry also moved the market. Early today, Alusuisse-Lonza (Algroup) of Switzerland, Pechiney of France and Alcan Aluminium of Canada said they would merge, passing U.S.-based Alcoa as the world leader in aluminum.

But Alcoa had a surprise of its own, going public with an offer to buy No. 3 Reynolds Metal Co. for $5.6 billion in cash and stock. Reynolds soared 9 3/8, to 65 1/4, and Alcoa, a Dow component, rose 2-15/16 for much of the day, then slipped at the close, ending at 65-15/16, down 1/2.

Meanwhile, Alcan rose 3-1/16, to 36-11/16, and Pechiney rose 2-5/16, to 30-9/16, although Algroup shares slipped on the Zurich stock exchange.

The market for new stocks was mixed. Shares of video-rental chain Blockbuster were priced at 15 and ended the day at 15. But Red Hat, a seller of Linux software, saw its shares soar from an offering price of 14 to close at 52-1/16.