The S&P/TSX composite index surged 253.34 points to 12,208.43 while the TSX Venture Exchange gained 21.62 points to 1,506.28.
A growing appetite for risk following a weak finish to 2011 pushed the greenback lower and sent the Canadian dollar up 0.58 of a cent to 98.91 cents US.
Markets in New York were sharply higher as data from the United States and China showed growing expansion in the manufacturing sector.
The Dow industrials jumped 179.75 points to 12,397.31.
The Nasdaq was up 43.57 points to 2,648.72 and the S&P 500 index climbed 19.46 points to 1,277.06 .
The U.S. Institute for Supply Management said its survey for last month showed the manufacturing index expanded more than expected, coming in at 53.9, better than the 53 that had been expected and higher than the 52.7 reading registered in November.
Traders were also relieved to see China's main manufacturing index showed expansion, coming in at 50.3 on manufacturing and jumping to 56 on services.
China has been an important prop for the fragile global economic recovery, supporting commodity prices and energy and mining stocks on the resource-heavy TSX. But growth slowed during 2011 as the Chinese government discouraged lending to control high inflation.
But traders were skeptical that the economic data signals a positive turning point for the global economy.
"It’s all good news," said John Stephenson, portfolio manager at First Asset Funds Inc.
"But am I betting this is part of a long-term trend? No. The only thing you can say that’s positive is at least what ails the world is somewhat known and therefore the surprises this year should be relatively less than the surprises last year."
Worries about a slowing global economy and a worsening eurozone government debt crisis pushed the TSX down 11 per cent last year.
Analysts say Europe will continue to pressure markets in the absence of a convincing mechanism to deal with the crisis.
This week, both France and Germany will be tapping bond markets in what will be fairly significant tests of market confidence.
Oil prices got extra lift from rising tensions between Western nations and Iran.
Oil prices jumped over US$3 after Iran test fired a surface-to-surface cruise missile Monday, part of 10-day naval manoeuvres scheduled to end Tuesday. Iran has threatened to close the Strait of Hormuz, where one-sixth of global crude exports pass, as possible retaliation to new U.S. economic sanctions over Iran's nuclear program.
The February crude contract on the New York Mercantile Exchange ran ahead $4.13 to US$102.96 a barrel, sending the TSX energy sector up 3.38 per cent. Canadian Natural Resources (TSX:CNQ) climbed $1.67 to C$39.82 while Cenovus Energy (TSX:CVE) climbed 97 cents to $34.80.
The base metals sector jumped just shy of five per cent as copper prices also advanced following the Chinese data. Copper is viewed as a key economic barometer because it is widely used in infrastructure projects and consumer products and China is the biggest buyer of the metal. The March contract in New York gained nine cents to US$3.53. Teck Resources (TSX:TCK.B) advanced $2.46 to C$38.37 while Ivanhoe Mines (TSX:IVN) moved up 79 cents to $18.88.
The gold sector gained about 3.6 per cent as a weak U.S. dollar helped push bullion higher with the February contract up $33.70 to US$1,600.50 an ounce. A weaker greenback usually helps depress commodity prices, which are denominated in dollars, as it makes oil and metals more expensive for holders of other currencies. Goldcorp Inc. (TSX:G) was up 77 cents to C$45.98 while Kinross Gold Corp. (TSX:K) gained 79 cents to $12.42.
The financials sector was up 1.5 per cent as Manulife Financial (TSX:MFC) rose 35 cents to $11.20 and CIBC (TSX:CM) climbed $1.28 to $75.07.
The consumer staples group was the main decliner as convenience store owner Alimentation Couche-Tard declined $1 to $30.70 while Shoppers Drug Mart (TSX:SC) shed 49 cents to $40.65.
Traders also took in a commitment by the U.S. Federal Reserve to start updating the public four times a year on how long it plans to keep short-term interest rates at record lows, starting with its Jan. 24-25 meeting.
The change could help assure investors, companies and consumers that rates won’t rise before a specific time and might help lower long-term yields further, in effect providing a kind of stimulus.
In corporate developments, shares in Research In Motion Ltd. (TSX:RIM) charged ahead 91 cents or 6.15 per cent to $15.71. The jump came amid reports that Barbara Stymiest, an independent director who joined RIM’s board in 2007, is believed to be the leading candidate to replace Jim Balsillie and Mike Lazaridis as chair of the smartphone maker's board of directors.
RIM has been under intense pressure from a group of shareholders to change the corporate leadership in the wake of a plunging share price because of missed profit estimates and delayed product launches.
Canadian Pacific Railway (TSX:CP) shares added 57 cents to $69.58. The company has denied a report attributed to the office of shareholder William Ackman saying some members of the CP board expressed interest in replace CEO Fred Green with former Canadian National (TSX:CNR) head Hunter Harrison. Ackman has spent more than $1 billion to amass a 14.2 per cent stake in CP.
Athabasca Oil Sands Corp. (TSX:ATH) stock rose 12 cents to $12.61 as it exercised its option to sell its remaining 40 per cent interest in the MacKay River oilsands project to a unit of Chinese oil giant PetroChina for about C$680 million. The deal gives PetroChina full ownership of MacKay River project, one of the newest of northern Alberta’s oilsands developments.
Vero Energy Inc. (TSX:VRO) has agreed to sell some of its natural gas assets for $209 million to pay off debt and refocus on light oil drilling. Its shares surged 57 cents or 27.4 per cent to $2.65.