The Dow Jones industrial average (INDU) gained 397 points, or 4.9%, after having been up 552 points earlier in the afternoon. The Standard & Poor's 500 (SPX) index rose 6.4% and the Nasdaq composite (COMP) gained 6.3%.

The market also rallied Friday. The two-session gain of 891.10 points was the biggest two-session gain ever, according to Dow Jones. The percentage gain of 11.8% was the biggest two-session percentage gain since Oct. 1987.

The S&P 500 also saw its biggest two-session percentage gain since Oct. 1987, rising 13.2%. Its point gain was not significant statistically.

"There is a massive amount of liquidity on the sidelines but it's sitting behind a dam of fear," said Stephen Leeb, president at Leeb Capital Management.

He said that there needs to be a major catalyst to really start it flowing, but Monday's news had certainly caused some cracks in the dam. In particular, the nomination of Timothy Geithner for secretary of the Treasury was helping Wall Street.

Stocks managed a last-hour rally Friday after reports surfaced that the New York Fed Bank president was Obama's pick. Geithner is currently the No. 2 man at the Federal Reserve after Chairman Ben Bernanke and was the Fed's point person on the Bear Stearns rescue - and Citigroup this weekend.

"Geithner assures a smooth transition between the Bush Administration and that of Obama, because he's already co-managing what's happening now," Leeb said.

Additionally, the combination of Citigroup's rescue and Obama's news shows that both the current and incoming administrations are being active in dealing with the economy. This was a relief after worries last week that there was a lack of leadership in general.

However, the two-day advance was also in part a bounce after a brutal October and two weeks of declines. Even when accounting for Friday's rally, last week was wretched, with the Dow off 5.3%, the Nasdaq off 8.5% and the S&P off 8%.

And the nearly 400-point rally Monday wasn't out of place for a market that has been moving in triple-digits regularly over the last year.

"You have to wonder if this was just a massive short-covering rally, because the fundamentals haven't really changed," said Kim Caughey, senior equity analyst at Fort Pitt Capital Group.

Short-covering is when investors who have sold stocks short to take advantage of a falling market need to buy the stocks back as they start to rise.

Caughey said she doesn't think this is the start of a new, sustained rally just yet. "I understand that the stock market is forward-looking, but I don't see a catalyst out there yet to turn the economy around."

Tuesday brings the release of the third-quarter GDP and the November Consumer Confidence report.

After the close Monday, Hewlett-Packard reported better-than-expected sales and revenue and forecast upbeat fiscal 2009 profit, matching the company's pre-announcement from Nov. 18.

Citigroup: The U.S. government announced a rescue package for the ailing bank on Sunday. The plan includes the Federal Deposit Insurance Corporation (FDIC) guaranteeing losses on more than $300 billion in bad assets.

Additionally, the Treasury will inject another $20 billion on top of the $25 billion it has already made available. The government will receive preferred shares in exchange.

The rescue followed a scary week for the venerable Wall Street firm, in which shares lost nearly two-thirds of their value during the week, while the stock fell below $4 a share, a multi-decade low.

Citi shares jumped almost 58% Monday, firing up the broader bank sector. Merrill Lynch (MER, Fortune 500) gained 38%, Morgan Stanley (MS, Fortune 500) gained 33%, Bank of America (BAC, Fortune 500) rallied 27%,JPMorgan Chase (JPM, Fortune 500) added 21%, Wells Fargo (WFC, Fortune 500) added 20% and American Express (AXP, Fortune 500) gained 13%.

The ProShares Ultra Financials (UYG) ETF rallied 27%.

It was the biggest one-day advance in the S&P financial-service sector's history, since S&P began tracking the group in this form in 1989.

Other movers: But gains covered a variety of stock sectors, with 29 of 30 Dow components rising. The lone decliner was Wall-Mart Stores, which lost a scant 0.3%.

Commodities stocks rose in tune with a rise in commodity prices. Dow components Exxon Mobil (XOM, Fortune 500) and Chevron (CVX, Fortune 500) followed oil prices higher. Component Alcoa (AA, Fortune 500) was among the metals and mining stocks on the rise.

Apple (AAPL, Fortune 500), Dell (DELL, Fortune 500), Microsoft (MSFT, Fortune 500) and Cisco Systems (CSCO, Fortune 500) were among the big tech stocks rising.

Market breadth was positive. On the New York Stock Exchange, winners beat losers by seven to one on volume of 2.04 billion shares. On the Nasdaq, advancers topped decliners by three to one on volume of 2.64 billion shares.

Obama economic team: The President-elect held a press conference in the afternoon in which he formally nominated his economic team.

Obama announced that Geithner is his pick for Secretary of the Treasury and that former Harvard President Lawrence Summers is his pick to run the National Economic Council.

Over the weekend, Obama provided an outline of his recovery plan, including the creation of 2.5 million jobs over the next two years.

At the press conference Monday, Obama said that there is a consensus across the spectrum that a stimulus plan is needed to "jolt this economy back into shape." He acknowledged that no matter what, the U.S. is going to see a big deficit next year because of all the government initiatives undertaken this year.

He also said that financial markets have reflected at times confusion about what the government's plan is to provide stability and that in the future there needs to be more transparency.

Economic news: The housing market continued to weaken, with sales of existing homes declining more than expected in October. The National Association of Realtors said sales fell to a 4.98 million unit annual pace in the month from a revised 5.14 million unit pace in September. Economists thought sales would decline to a 5.05 million unit rate.

Other markets: Global markets were mixed, with Asian stocks ending lower and European markets ending higher.

U.S. light crude oil for January delivery rose $4.57 to settle at $54.50 a barrel on the New York Mercantile Exchange.

The dollar fell versus the euro and gained against the yen.

COMEX gold for January delivery rallied $27.80 to settle at $819.90 an ounce.

Gasoline prices continued to slump to 3-1/2 year lows, with gas down 2.1 cents to a national average of $1.908 a gallon, according to a survey of credit-card activity released Monday by AAA. Prices have been dropping for over two months. In that time, prices have lost $1.95 a gallon, or over 50%.

Bonds: Treasury prices plunged, raising the yield on the benchmark 10-year note to 3.34% from 3.19% Friday. Last week, the 2-year, 10-year and 30-year government bonds all hit the lowest levels since the Federal Reserve started keeping records in 1962.

The yield on the 3-month Treasury bill slipped to 0.01% from 0.02% on Friday, not far from 68-year lows of zero. The 3-month - seen as the safest place to put money in the short term - last hit these levels in September as investor panic peaked. The low yield means nervous investors would rather preserve their money despite no interest rather than risk the stock market.

Lending rates rose a bit. The 3-month Libor rate rose to 2.17% from 2.16% Friday, while overnight Libor rose to 0.8% from 0.7% Friday, according to Bloomberg.com. Libor is a key bank lending rate. 

NEW YORK (CNNMoney.com) -- The U.S. federal government on Sunday announced a massive rescue package for Citigroup - the latest move to steady the banking giant, whose shares have plunged in the past week.

The plan has two key features:

First, the U.S. Treasury and the Federal Deposit Insurance Corporation (FDIC) will backstop some losses against more than $300 billion in troubled assets.

Second, the Treasury will make a fresh $20 billion investment in the bank. The government has already injected $25 billion into Citigroup as part of the $700 billion bailout passed by Congress in October.

In return for the latest intervention, the government will receive an additional batch of preferred shares - $20 billion for its direct investment and $7 billion as compensation for the loan guarantees. Citigroup will pay an 8% dividend rate on those shares.

In addition, the government will get warrants, or the right to purchase $2.7 billion worth Citigroup shares in the future.

The government will impose restrictions as well. Citigroup will be prohibited from paying out a dividend of more than a penny per share for the next three years and will face limits on executive compensation.

Plus, Citigroup will be expected to adjust mortgages for troubled borrowers, using procedures similar to those the FDIC implemented at IndyMac, which it took over last summer.

"With these transactions, the U.S. government is taking the actions necessary to strengthen the financial system and protect U.S. taxpayers and the U.S. economy," Treasury, Federal Reserve and the FDIC said in a joint statement.

Under the terms of the Citigroup rescue package, the bank would be on the hook for the first $29 billion in losses on the covered assets, which includes mostly loans backed by residential and commercial mortgages. It would cover 10% of losses above that amount, with the government shouldering the rest.

Despite the massive rescue effort, regulators did not push for a management change at Citigroup. In recent days, there had been speculation that Citigroup CEO Vikram Pandit could step down. There had also been talk that the company was considering replacing Chairman Sir Win Bischoff, although the company denied such reports.

Citigroup has been one of the hardest hit financial firms since the mortgage market first started to unravel in the fall of 2007. Over the past four quarters, the company has recorded close to $21 billion in losses.

Investors seemed encouraged by news of the Sunday night rescue, with futures for U.S. markets pointing to a higher open Monday.

Federal Reserve Chairman Ben Bernanke and Timothy Geithner, president of the New York Fed, were both involved in the weekend talks over Citigroup's fate, according to government officials. Geithner is expected to be nominated to be Treasury Secretary by President-elect Barack Obama.

There had been concerns that letting another major financial institution fail would have disastrous consequences for both the U.S. economy as well as the global financial system. The bank had more than $2 trillion in assets as of the end of the third quarter and has operations in more than 100 countries.

Last week, fears about Citigroup's fate rattled equity markets around the globe and sent shares of the 196-year-old firm plummeting to levels not seen in over a decade.

Citigroup shares lost close to two-thirds of their value for the week, even as the company announced plans to layoff more than 50,000 workers and as its largest individual shareholder upped his stake.

By the close of trading on Friday, Citigroup (C, Fortune 500) shares had dipped below $4 a share, and were down 87% for the year.

The most recent slide in Citigroup stock comes on the heels of news earlier this month that the Treasury Department was abandoning its initial rescue plan to buy troubled assets from banks - Citigroup had been seen as a major beneficiary of that strategy.

Instead, as part of the $700 billion bailout package that was signed into law in early October, Treasury has focused on making direct investments in banks. In exchange for equity stakes, the agency has injected $25 billion into Citigroup and an additional $100 billion into eight other major U.S. financial institutions.

Despite the recent events, many industry experts had stressed that Citigroup is relatively healthy. Two veteran banking analysts - Mike Mayo of Deutsche Bank and Ladenburg Thalman's Richard Bove - both advised clients last week that Citigroup could survive substantial loan losses.