NEW YORK (CNNMoney)
The Dow Jones industrial average and the S&P 500 rose 0.5%, while the Nasdaq gained 0.8%.
Investors have been reluctant to place big bets before lawmakers reach a compromise on tax increases and spending cuts set to kick in automatically on Jan. 1. Without a deal, the U.S. economy could fall back into a recession.
"As has been the case since the elections, the main issue affecting U.S. markets remains the fiscal cliff," said Russ Koesterich, global chief investment strategist at BlackRock. "Although it is impossible to know exactly what is going on behind closed doors, on the surface, the two parties still seem quite far apart on the three main fiscal cliff issues."
Koesterich said the odds of going over the cliff are higher than what the market has priced in so far, which means there is heightened risk for a sell-off. Plus, even if a deal is reached before the end of the year, it will likely be only a "small, stopgap sort of agreement" that will still weigh on economic growth.
Related: Federal Reserve may buy more bonds
Meanwhile, investors are waiting to hear what the Fed will have to say at the conclusion of its two-day meeting, which begins Tuesday. The central bank will have to decide the fate of one of its stimulus programs, Operation Twist, which is set to end this month. The Fed will also provide new economic forecasts.
In other news, the Census Bureau reported that the trade deficit widened to $42.2 billion in October.
Related: Forget the fiscal cliff, the economy is rebounding
On the corporate front, Delta Air Lines (DAL, Fortune 500) and Virgin Atlantic announced a new joint venture, which includes Delta buying the 49% stake in the British airline that is currently owned by Singapore Airline. Virgin Group and Sir Richard Branson will retain the majority 51% stake and Virgin Atlantic will maintain its brand. Delta shares gained ground in early trading.
Discount retailer Dollar General (DG, Fortune 500) posted a higher-than-expected profit for the third quarter, and sales in line with forecasts, but shares of the company declined on a weak outlook.
The Treasury Department will sell the last of its shares in bailed-out insurer AIG (AIG, Fortune 500) for $32.50 apiece, raising about $7.6 billion. Between the Fed and Treasury's combined $182 billion injection into AIG, the government enjoyed a profit of $22.7 billion.
HSBC (HBC) said early Tuesday it will pay $1.92 billion to resolve money-laundering allegations.
Europe is also in the spotlight after Italian Prime Minister Mario Monti unexpectedly announced plans over the weekend to step down once parliament passes a national budget later this month.
Fear & Greed Index
European markets edged higher in afternoon trade, helped by a sharp rise in German investor sentiment in December. Greece is due to announce the results of a debt buyback later, triggering the disbursement of the next installment of its EU-IMF bailout funds.
Asian markets ended mixed, with the Nikkei and Shanghai Composite losing ground.
The dollar fell against the euro and the British pound, But gained versus the Japanese yen.
Oil prices for January delivery rose 15 cents to $85.71 a barrel, while gold priced for February delivery fell slightly to $1,708.60.
The price on the 10-year Treasury fell, boosting the yield to 1.65% from 1.62% late Monday. 
First Published: December 11, 2012: 9:51 AM ET
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