The S&P/TSX composite index jumped 171.94 points to 11,507.71 while the TSX Venture Exchange gained 7.02 points to 1,285.57.
The Canadian dollar gained 0.16 of a cent to 96.34 cents US as the Bank of Canada said that it was leaving its key interest rate unchanged at one per cent because of a worsening economic environment. It also kept the door open for future rate hikes.
In its accompanying statement, Canada's central bank said "to the extent that the economic expansion continues and the current excess supply in the economy is gradually absorbed, some modest withdrawal of the present considerable monetary policy stimulus may become appropriate."
Data showing greater expansion in the U.S. service sector helped lift markets.
New York's Dow Jones industrial average was up 26.49 points to 12,127.95.
The Nasdaq composite index added 18.1 points to 2,778.11 and the S&P 500 index climbed 7.32 points to 1,285.5 as the Institute for Supply Management's non-manufacturing index came in at 53.7, up from 53.5 in April.
The gain followed a slide of almost two per cent last week as the European debt crisis spread to Spain's banking sector.
"One of the real issues that investors are wrestling with is that people have lost confidence in the ability of the Europeans to deal with the problem (of recapitalizing their banking system)," said Norman Raschkowan, North American strategist for Mackenzie Financial Corp., adding the problems in the banking sector don’t end at the Spanish border.
"The Italian banks are stretched and the French banks are stretched. I think unfortunately the Europeans still haven’t come to that basic appreciation of how critical the capitalization of the banks is for confidence."
The country’s banks are weighed by toxic loans following the implosion of the country’s real estate sector in the wake of the 2008 financial collapse.
Spain’s most stricken lender, Bankia S.A., needs €19 billion in government aid, but Spain only has €5 billion left in a €19 billion fund that it established in 2009 to help banks.
Those banks may force the country to seek a bailout. Spain, strapped for cash, might have to tap European Union rescue funds, but it is reluctant to do so because such aid would come with strict conditions.
Spain has been forced to pay ever higher amounts of interest to attract buyers for its debt with the yield on the country’s 10-year bond up 0.02 of a point to 6.42 per cent before dipping back to 6.31 per cent.
Spanish Treasury Minister Cristobal Montoro said Tuesday said that, given current borrowing costs, financial markets had effectively shut out the country.
And he repeated the country’s calls for the European Union to move faster towards establishing a banking union that would allow ailing lenders to seek help without governments intervening.
Meanwhile, finance ministers and central bank governors from seven of the world’s main economies were holding a conference call Tuesday to discuss Europe's worsening debt crisis.
Canadian Finance Minister Jim Flaherty and Bank of Canada governor Mark Carney took part in the call.
And although Flaherty’s office in Ottawa released a statement it did not provide details of any pledge from European leaders.
However, Japan’s finance chief Jun Azumi reportedly said that the European members in the call pledged to “speed up their efforts” to contain the crisis.
The energy sector was up almost 2.5 per cent as oil oscillated between slight gains and losses during the session before the July crude contract on the New York Mercantile Exchange closed up 31 cents to US$84.29 a barrel. Suncor Energy (TSX:SU) was ahead 59 cents to $28.30 while Cenovus Energy (TSX:CVE) advanced 36 cents to $30.88.
The base metals sector was ahead 1.36 per cent while copper prices dipped two cents at US$3.29 a pound. Teck Resources (TSX:TCK.B) climbed three per cent or 92 cents to $31.41 and Ivanhoe Mines (TSX:IVN) climbed 46 cents to $10.14.
The resource sectors have racked up the steepest losses on the TSX, which is down about 10 per cent from its 2012 highs from late February.
The financial sector was up 1.3 per cent with TD Bank (TSX:TD) ahead $1.18 to $77.68 and Manulife Financial (TSX:MFC) ran up 19 cents to $10.77.
Utilities were also higher as TransCanada Corp. (TSX:TRP) said it has been chosen by Shell Canada Ltd. to build, own and operate a $4-billion natural gas pipeline in British Columbia. The Calgary-based company said the pipeline will transport natural gas from the Montney region in eastern British Columbia to a liquefied natural gas export facility near Kitimat, B.C. Its shares gained 33 cents to $42.48.
The gold sector was ahead about 0.75 per cent as bullion prices improved, up $3 to US$1,616.90 an ounce. Iamgold Corp. (TSX:IMG) gained 54 cents to $12.68 while Goldcorp Inc. (TSX:G) rose 63 cents to $41.78.
In other corporate news, Westport Innovations Inc. (TSX:WPT) has teamed up with global giant Caterpillar Inc. to co-develop natural gas technology to fuel off-road heavy equipment that typically use diesel. Caterpillar will fund the development program and Westport, a Vancouver-based specialist in engine technology, expects to supply key components for products developed under the initiative. Westport shares jumped $5.02 or 21.68 per cent to $28.17.
Belden Inc. (NYSE:BDC) has made a friendly takeover offer for Montreal-based Miranda Technologies Inc. (TSX:MT), which makes high-performance hardware and software for the television industry. Belden's offer of $17 per share cash values Miranda at about $371.5 million. Miranda's share price jumped 62 per cent to $16.87