It may just be a temporary bounce, but investors appear to believe that Washington can salvage a plan to buy back troubled mortgage assets despite rejection by the House on Monday.

Stocks surged in their strongest rally since 2002, making up more than half the losses that came on Monday. The Dow Jones industrial average rose 485.21 points, or 4.68 percent, while the Standard & Poor’s 500-stock index rose 5.27 percent.  Many battered financial stocks rose sharply.  Still, the S&P 500 was down 9 percent for the quarter, which ended today.

Today's gains came amid indications that the Senate would move ahead with a vote on a plan. The New York Times reports that House Democrats were discussed the plan in telephone conference calls, despite the recess for Rosh Hashanah. Stocks were also helped by word of possible changes in mark-to-market accounting rules.

The  Senate  is expected to take up the $700 billion financial bailout bill on Wednesday, despite the stunning "no" vote in the House.  Republicans in the Senate have been more enthusiastic in their support of the proposal than House Republicans.

Politico.com says, "Leading House Democrats believe that a strong Senate vote—coupled with turmoil in financial markets—will create enough pressure for the House to relent."

Yet as Matt Cooper spells out on Portfolio.com, "in the coming days, it's hard to see those House Republicans reversing their votes." Few options remain, Cooper says.

And there are just six weeks until the election.

President Bush again urged lawmakers to pass a bailout bill. "We are in a urgent situation," he said in a statement this morning, warning that the economic effects of failing to act "will be painful and lasting."

More signs of the growing grip of the credit crisis emerged today.

The cost of short-term bank loans to other banks surged overnight. The global benchmark, the Libor, or the London Interbank Offered Rate, jumped 431 basis points, to a record high of 6.88 percent today.

"The money markets have completely broken down, with no trading taking place at all," Christoph Rieger, a fixed- income strategist at Dresdner Kleinwort in Frankfurt, told Bloomberg News. "Central banks are the only providers of cash to the market, no one else is lending."

The credit freeze has spurred speculation that the Federal Reserve and other leading central banks may now have to also cut interest rates as part of their effort to free up liquidity.

And another big European bank had to be rescued today. The French and Belgian governments have provided a $9 billion lifeline to Dexia.

Even Steve Ballmer, Microsoft's chief executive, spoke of the crisis' impact today, saying that "no company is immune."

"Financial issues are going to affect both business spending and consumer spending," Ballmer said in Olso, Norway, Reuters reported.