Stocks Snap 3-Day Slide

US stocks snapped a three-day slide Wednesday as investors saw hope for further economic stimulus from the Federal Reserve.

The Dow Jones Industrial Average saw a strong morning rally evaporate during the afternoon, but still finished with a gain of 44.73 points, or 0.4 percent, at 12,491.61. The Standard & Poor's 500-stock index climbed 4.08 points, or 0.3 percent, to 1,317.72, while the Nasdaq Composite added 15.01 points, or 0.5 percent, to 2,796.92.

Energy and materials stocks led the day's gains, helped by a fall in oil inventories. Caterpillar was the Dow's biggest winner, rising 1.6 percent, while Disney and Merck each added about 1.1 percent.

Investors had sent the Dow about 160 points higher on the day after Fed Chairman Ben Bernanke told legislators that the Fed was "prepared to respond" if stimulus was needed, signaling to some that he was keeping the door open for a third round of quantitative easing, known as QE3.

Those hopes had been bolstered by signs of slowing price inflation, after US import prices fell last month for the first time in a year. Slowing inflation would give the Fed more leeway to maintain ultra-low interest rates for the time being. Reports on consumer and producer prices due out this week are also expected to show a monthly decline in overall inflation, and on Wednesday, Bernanke warned about the potential of a deflationary threat.

But that enthusiasm had faded by the afternoon, with financials weakening considerably in the afternoon ahead of second-quarter earnings from J.P. Morgan Chase, set for release Thursday.

Another member of the interest rate-setting Federal Open Market Committee, Richard Fisher, raised doubts about the prospects of QE3, saying, "I firmly believe that the Federal Reserve has already pressed the limits of monetary policy" and should do no more on this front.

European shares were broadly higher, with German, French and British stock indexes each notching its first gain in four sessions, as the Chinese data helped turn investor attention from the eurozone's sovereign-debt problems. The broader Stoxx Europe 600 gained 0.7 percent.

The euro surged to $1.4140, from $1.3976 late Tuesday, a day after Moody's Investors Service demoted Ireland's bonds to "junk" status. The yen also gained on the dollar.Read more: WSJ