Stock markets are starting the week with a big gain, feeling more confident that American politicians can come together to agree on a budget deal by the end of next month.

In Toronto, the S&P/TSX composite index jumped 162.68 points, or 1.37 per cent, to close at 12,040.40.

The Dow Jones industrial average was up 207.65 points, or 1.65 per cent, at 12,795.96.

The Standard & Poor's 500 index rose 27.01, or two per cent, to 1,386.89.

The Nasdaq composite average gained 65.94, or 2.21 per cent, to 2,916.07. U.S. volume was light on the first day of a holiday-shortened trading week.

American markets will be closed on Thursday for Thanksgiving and will close early Friday.

The Canadian dollar traded above parity with the American currency, up 0.44 of a cent to 100.34 cents US.

Oil traders watch Gaza

Benchmark crude closed up 2.72 per cent, or $2.36, at $89.28 US a barrel, as traders kept as eye on the escalating conflict between Israel and Hamas, which could raise concerns about Middle East crude supplies.

Bullion for next month delivery gained $19.70 to $1,734.00 US an ounce.

U.S. President Barack Obama and Congressional leaders emerged from a meeting Friday signalling they were prepared to cede some long-held bargaining positions.

Republican House Speaker John Boehner and Senate Minority Leader Mitch McConnell, also of the GOP, both said they offered higher tax revenue as part of a deal.

"The sticking point remains extending the Bush-era tax cuts for the wealthy and neither side has yet to cede ground on this issue," said BMO Capital Markets senior economist Sal Guatieri.

"However, Friday's meeting marks progress and, if anything, is a welcome change from the post-election sabre-rattling."

"It is quite clear that both sides want to come to a compromise and that a reasonable compromise is available," said David Kelly, chief global strategist for J.P. Morgan Funds, in a note to clients.

European markets also higher

European markets rallied too, as traders also monitored Greece's quest for its latest round of bailout cash. Greece needs international lenders and the International Monetary Fund to release the money so that Greece can meet upcoming payments to creditors.

London's FTSE 100 index closed up 1.06 per cent, Frankfurt's DAX ahead 1.14 per cent and the Paris CAC 40 up 1.69 per cent.

Ministers from the eurogroup meet Tuesday ahead of a summit of their leaders later in the week that will discuss the European Union's budget for the next few years.

Markets finished positive on Friday but prior to that the TSX had tumbled 3.9 per cent since the election Nov. 6 as a U.S. economic shock would impact economies around the world.

A sudden slowing of growth would be bad news for a resource heavy market like Toronto, since a lessening of demand for oil and metals would put pressure on mining and energy stocks.

Meanwhile, the Dow industrial average has fallen five per cent as investors worry about higher dividend, capital gains and payroll taxes.

With files from The Canadian Press and The Associated Press