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Stock market rebounds after a two-day slump

Brendan Mcdermid / Reuters

Traders work on the floor of the New York Stock Exchange Wednesday. U.S. stocks rebounded after a steep two-day drop.

By msnbc.com news services

U.S. stocks rebounded Wednesday after a steep two-day drop as international leaders scrambled to save a week-old plan to prevent a financial crisis in Europe. Strong corporate earnings and a bump up in hiring by private companies also helped turn markets around.

The Dow Jones industrial average closed the day up 178 points. The index lost 573 points the previous two days after the brokerage MF Global collapsed and Greece's prime minister surprised markets and his own government with a call to put unpopular austerity measures to a public vote.

"It's crazy how much the markets dropped in two days, considering that the data of the U.S. economy has actually looked pretty good," said Barry Knapp, head of equity strategy at Barclay's Capital. "It just shows you how fragile the investor psychology is with Greece hanging over everything."

For much of the summer, investors were worried that the U.S. economy was on the verge of another recession. But signs that consumers are continuing to spend and that manufacturing expanded in September have put many of those concerns to rest.

The Federal Reserve said Wednesday that the U.S. economy would likely expand over the next two years. But Fed Chairman Ben Bernanke cautioned that the pace of economic growth will likely be "frustratingly slow." The Fed said it would not take any more steps to help the economy for now, but it left open the possibility of more steps later.

The fear of a wider financial crisis eased somewhat Wednesday as the euro rose against the dollar and Treasury prices slipped. A revolt in George Papandreou's government could scuttle the Greek referendum, which is seen as a relief to investors because it would keep the bailout plan intact. Papandreou faces a confidence vote on Friday.

Should voters reject the austerity plan, it could lead to a messy default on Greece's debt that would send shock waves through Europe's financial system and likely cause massive losses for banks that hold Greek bonds. Only last week European leaders agreed to a wide-ranging plan to shore up European banks and heavily indebted countries like Greece and Italy.

Papandreou traveled to France Wednesday and is scheduled to meet with leaders of the Group of 20 nations Thursday and Friday. France and Germany are expected to insist that a bailout plan reached last Thursday is the best way to solve Europe's debt problems and avoid a financial crisis.

In the U.S., an increase in hiring by private companies helped lift stock prices. Automatic Data Processing said company payrolls rose by 110,000 in October, more than economists had expected. Most of the gains came from the service industry. ADP also revised its survey results for September higher. Investors see ADP's report as a precursor to the government's broader employment report, which is due out Friday.

The Associated Press and Reuters contributed to this report.