After a difficult August, Wall Street began September with a big rally thanks to encouraging news about the manufacturing sectors in the United States and China.

The Dow Jones industrial average shot up 254.75 points, or 2.5%, to 10,269.47. The broader Standard & Poor’s 500 index soared 3%, as did the tech-dominated Nasdaq composite index.

In Europe, key stock indexes shot up 3.8% in France and 3.5% in Spain.

The surge came after the major U.S. indexes sank more than 4% in August on economic data that indicated a slowdown in economic growth and raised fears of a double-dip recession.

The manufacturing data Wednesday encouraged investors who thought the bearish sentiment had gone too far. Only 20.7% of investors ended August with a bullish outlook, the smallest percentage since the stock market hit bottom in March 2009, according to a index of market sentiment compiled by the American Assn. of Individual Investors.

“The catalyst allows you to look at things with a clearer head,” said Jim Paulsen, the chief investment strategist for Wells Capital Management. “The pessimism got extreme at the end of August there, and extreme pessimism is a sign that people are overdoing it.”

Wall Street opened higher Wednesday after a report from China indicated faster-than-expected growth in the country’s manufacturing sector.

The rally soon accelerated on an unexpected increase in a similar index of U.S. manufacturing activity. The Institute for Supply Management’s gauge rose to 56.3 from 55.5 last month; anything above 50 suggests the sector is growing.

The manufacturing numbers were particularly encouraging because factory sector has been one of the leading drivers of the economic recovery since it began.

The positive news relieved some of the pressure on the market for U.S. Treasury bonds, which some investors had bought as a hedge against a worsening of the economy. The yield on the benchmark 10-year T-notes jumped to 2.58% from Tuesday’s 19-month low of 2.47%.

The shift in sentiment Wednesday was such that investors appeared to shake off some economic reports that were less encouraging.

ADP, a payroll-service company, said private companies cut a net 10,000 jobs in August; analysts had expected an increase.

Analysts on average expect the Labor Department to report Friday that U.S. employers, including governments, shrank their payrolls by 100,000 jobs in August.

Other reports Wednesday showed weak car sales in August and a bigger-than-expected drop in construction spending in July.

Despite Wednesday’s sharp gains, stocks are unlikely to see a sustained rebound as long as the U.S. continues to suffer from high unemployment, said John Stoltzfus, chief market strategist at Ticonderoga Securities.

“The reality is we’ve been here before where we’ve seen rallies followed by sell-offs,” Stoltzfus said. “We expect that until some substantial catalyst arrives on the landscape the market is likely to be a giveth and taketh market, with short rallies and short sell-offs.”

nathaniel.popper@latimes.com

Stocks surge amid signs of growth in manufacturing

Islamic militants are exploiting the strain this summer’s monsoon floods placed on the military and government by regrouping their forces in northwest Pakistan, provincial officials warned Thursday.

Sen. John Kerry, who is in Islamabad, also expressed concern about a strengthening insurgency as he announced that the United States would ramp up its flood relief package to $150 million.

As the crisis nears its fourth week, officials in Islamabad and Washington are increasingly worried that Taliban militants and other Islamic extremist groups will take advantage of a disaster that has forced 60,000 Pakistani troops into flood relief work and diverted police resources across the country.