The Wall Street Journal reported that the tweet posted on the Associated Press's Twitter account falsely said that there were two explosions in the White House. The tweet also said falsely that President Barack Obama had been hurt.
As the false story circulated, the Dow Jones industrial average dropped about 145 points, the Journal said.
Investors regained their composure. By the close of trading, the DJIA added 152.20 points or 1.05 percent to 14,719.46.
The Dow's leader for the day was du Pont, which gained 4.13 percent on a quarterly report that beat expectations. UnitedHealth Group Inc. was the Dow's biggest loser, dropping 1.15 percent.
The S&P 500 added 16.28 points or 1.04 percent to 1,578.78. The Nasdaq index of tech-dominated stock gained 35.78 points or 1.11 percent to 3,269.33.
On the New York Stock Exchange, 2,451 stocks advanced and 620 declined on a volume of 3.5 billion shares traded.
Gold slipped after a three day winning streak. Gold shed $7.50 to $1,4213.60 per troy ounce on the Comex division of the New York Mercantile Exchange. NYMEX West Texas Intermediate crude oil closed at $89.38 per barrel, up 19 cents.
The 10-year U.S. treasury note fell 5/32 to yield 1.713 percent.
Against the dollar, the euro was lower at $1.30 from Monday's $1.3067. Against the yen, the dollar rose to 99.46 yen from 99.23 yen.
The Nikkei 225 in Japan shed 0.29 percent or 38.72 points to 13,529.65. The FTSE 100 index in Britain added 2 percent or 125.50 points to 6,406.12.
On the Chicago Board of Trade, corn for July delivery gave up 9.5 cents to $6.14 per bushel. July soybeans dropped 6.75 cents to $13.575 and July wheat lost 6.5 cents to $6.96.