May 2 (Bloomberg) -- U.S. stocks rose as a weaker-than- expected report on manufacturing suggested the Federal Reserve will stick to gradual interest-rate increases. A rebound in oil prices lifted energy shares such as ChevronTexaco Corp.

American International Group Inc. led the Dow Jones Industrial Average higher as the company's disclosure of $1 billion in additional accounting errors signaled its missteps were largely behind it. Last month, the Dow average suffered its worst monthly drop since 2003.

``The market was somewhat oversold and is getting a little bit of a bounce,'' said Carlton Neel, who helps manage $1.4 billion at Phoenix/Zweig Advisers in New York. From the Fed, investors will see ``one more, maybe two more tightenings.''

Benchmark indexes gave up their gains following the midday rally in oil above $50 a barrel and then recovered most of their earlier advance as energy shares rose. The comeback was also aided by optimism before the Fed meeting tomorrow.

The Dow industrials added 59.19, or 0.6 percent, to 10,251.70. The Standard & Poor's 500 Index increased 5.31, or 0.5 percent, to 1162.16. The Nasdaq Composite Index ended up 7, or 0.4 percent, at 1928.65.

The Institute for Supply Management's factory index fell to 53.3 in April from 55.2, less than the reading of 55 expected by economists in a Bloomberg News survey. The Commerce Department said construction spending in March rose 0.5 percent to a record $1.052 trillion. Economists forecast a 0.3 percent gain.

Fed Meeting

Investors will get more insight into the economy from tomorrow's Fed meeting on interest rates. The central bank has lifted its overnight bank lending rate by a quarter point at each of the past seven meetings and has stuck to a plan of raising borrowing costs at a ``measured'' pace.

All 22 of Wall Street's biggest bond-trading firms surveyed by Bloomberg News expect another quarter-point increase to 3 percent. Of those primary dealers, five expect the Fed to drop its use of the word ``measured'' tomorrow.

``Markets don't like change,'' said Joseph Zock, who helps manage $900 million at Capital Management Associates in New York. The language ``provides investors with confidence that rates won't soar too high and the economy is moving at a measured pace as well.''

Thirteen stocks were up for every six that fell on the New York Stock Exchange. Some 1.6 billion shares changed hands on the Big Board, 2.4 percent less than the three-month daily average.

Oil Rebounds

An index of energy shares gained 1.8 percent for the biggest advance among the S&P 500's 10 industry groups. ChevronTexaco, the No. 2 U.S. oil company, rose $1.21 to $53.21. Burlington Resources Inc., a natural-gas and oil producer, added $1.36 to $49.97.

Crude oil rebounded from a two-month low after Algeria's energy minister said global fuel demand remains ``very strong.'' Crude oil for June delivery rose 2.4 percent to $50.92 a barrel in New York. Futures earlier touched $49.03, the lowest since Feb. 22.

AIG rallied $2.59, or 5.1 percent, to $53.44 for the biggest jump in the Dow average. The world's biggest insurer said it will correct five years of financial results for reinsurance and other transactions that inflated net worth by $2.7 billion, or $1 billion more than an earlier estimate.

The announcement assured investors that AIG made the accounting missteps to present smooth quarterly profit for Wall Street analysts, rather than mask underlying weakness in the company. AIG had lost more than $58 billion of stock-market value since probes by New York Attorney General Eliot Spitzer and the Securities and Exchange Commission became public in February.

Time to Buy?

Prudential Equity Group LLC chief investment strategist Edward Keon became more optimistic about U.S. stocks after the Dow average last week finished its worst month since January 2003, dropping 3 percent in April. The S&P 500 lost 2 percent and the Nasdaq slumped 3.9 percent in the period.

Keon raised his recommended stock allocation to 80 percent from 75 percent. First-quarter ``earnings have been terrific,'' Keon wrote in a note to clients. He is now the most bullish U.S. strategist among 14 surveyed by Bloomberg.

His view contrasts with JPMorgan's Abhijit Chakrabortti, who cut his U.S. and global weighting on stocks to 55 percent from 70 percent. Earnings growth will fall ``below trend'' and there will be ``no growth'' in 2006, the strategist wrote.

Google Inc., the most-used Internet search engine, added $2.29 to $222.29. The company will see higher earnings due to the ``significant growth in sponsored-search advertising,'' Prudential analyst Mark J. Rowen wrote in a report. He raised his share-price target to $284 from $260.

Verizon, MCI

Verizon Communications Inc. lost 83 cents to $34.97 after MCI Inc., the No. 2 U.S. long-distance phone company, accepted its takeover offer. MCI shares fell 83 cents to $25.70.

Verizon raised its bid to $26 a share, the third increase, after MCI shareholders complained previous offers were too low. Qwest Communications International Inc. then said it's no longer in the interest of shareholders, customers and employees to continue pursuing its takeover bid for MCI. Qwest, the No. 4 local-phone company, gained 5 cents to $3.47.

Neiman Marcus Group Inc. lost $5.36 to $92.96. The department-store chain that sells $4,800 Gucci purses agreed to be bought by Texas Pacific Group and Warburg Pincus LLC for $5.1 billion. The two buyout firms said they will pay $100 a share. The stock had surged 50 percent since its 2005 low on Jan. 28.

Brokerages Slide

Brokerages slumped after UBS AG cut its rating on them, citing concern about demand for equities. UBS downgraded Goldman Sachs Group Inc., Lehman Brothers Holdings Inc. and Merrill Lynch & Co. to ``neutral'' from ``buy.''

Merrill, the world's largest securities firm by capital, fell 85 cents to $53.08. Goldman, the third biggest, slid $2.33 to $104.46. Lehman, the No. 5, declined $3.27 to $88.45.

Morgan Stanley, the No. 5 securities firm, dropped $3.23 to $49.39. The 6.1 percent tumble was the steepest in the S&P 500. The company said its board decided to keep Philip J. Purcell as chairman and chief executive, rejecting demands by former executives that he be ousted.

The market's slump last month was unusual. Since 1950, April has been the best month for the Dow average, according to the Stock Trader's Almanac. May is among the worst for the benchmark, with the Dow gaining an average 0.1 percent. The trend for May probably won't change, according to Jeffrey Hirsch, president of the Old Tappan, New Jersey-based Stock Trader's Almanac.

The Russell 2000 Index, which tracks companies with a median market value of $523 million, climbed 1.1 percent to 585.86. The Dow Jones Wilshire 5000 Total Market Index, the broadest measure of U.S. shares, rallied 59.31, or 0.5 percent, to 11,426.87. Based on changes in the Wilshire, the value of stocks increased by $74.1 billion.

American International Group Inc. (AIG US)
Burlington Resources Inc. (BR US)
ChevronTexaco Corp. (CVX US)
Goldman Sachs Group Inc. (GS US)
Google Inc. (GOOG US)
Lehman Brothers Holdings Inc. (LEH US)
MCI Inc. (MCIP US)
Merrill Lynch & Co. (MER US)
Morgan Stanley (MWD US)
Neiman Marcus Group Inc. (NMG/A US)
Qwest Communications International Inc. (Q US)
Verizon Communications Inc. (VZ US)

To contact the reporter on this story: Ari Levy in New York at alevy5@bloomberg.net.

Last Updated: May 2, 2005 17:19 EDT