By Richard Leong

But doubts about the effectiveness of this bold federal move cut into early gains, while weakness in the semiconductor sector erased gains on Nasdaq.

Investors worldwide had poured into stocks after the U.S. government on Sunday seized control of the two struggling government-sponsored enterprises, in what could be among Washington's biggest bailout ever.

Fannie Mae and Freddie Mac are critical to the U.S. housing market and any recovery in home prices will be largely dependent on the health of the, which are the biggest providers of housing finance in the country.

Stocks retreated from their powerful open, as more investors questioned the benefits to the housing sector and the rest of the economy from the government's decision to rescue the two companies, which invest in and guarantee mortgages.

"There was an initial euphoria. Now you have folks taking half a step back looking at the plan," said Chip Hanlon, president of Delta Global Advisors in Huntington Beach, California.

"This is just delaying the day of reckoning," he added.

The Dow Jones industrial average was up 110.16 points, or 0.98 percent, at 11,330.47 after gaining as much as 350 points or 3.1 percent. The Standard & Poor's 500 Index was up 5.77 points, or 0.46 percent, at 1,248.08. The Nasdaq Composite Index was down 17.08 points, or 0.76 percent, at 2,238.80.

Shares of investment bank Lehman Brothers plunged following news that its executives were meeting with potential buyers for the bank's Neuberger Berman asset management arm. Investors worried Lehman may be forced to sell the unit at a bargain basement price.

But overall, shares of financial services companies, including banks, led gainers. Bank of America was up more than 5 percent at $34.00, while JPMorgan Chase rose 3.5 percent at $40.98. The stocks were among the top boosts to both the Dow and the S&P 500. The S&P financial index rose more than 2.7 percent.

Home builders also advanced, with the Dow Jones home construction index rising more than 6 percent.

Shares of luxury homebuilder Toll Brothers jumped 5.5 percent to $25.52 on the New York Stock Exchange.

The bailout of Fannie and Freddie is likely to shore up confidence in the beleaguered financial sector by helping stem the wave of write-downs buffeting banks as they pile up losses stemming from soured mortgage investments, according to analysts.

The takeover plan makes it more explicit that debt issued by Fannie Mae and Freddie Mac will be backed by the U.S. government.

The federal takeover, however, could wipe out their common and preferred shareholders. Fannie and Freddie common stocks were trading at about $1 a share, off more than 80 percent from Friday's close on New York Stock Exchange.

In other sectors, shares of Altria , the maker of Marlboro cigarettes, jumped 3.3 percent to $21.65 after the company said it was buying smokeless tobacco maker UST for $10.4 billion.

On the Nasdaq, semiconductor shares weakened with an index on the group <.SOXX> down 1.2 percent.

Several brokerages on Monday downgraded National Semiconductor after the analog chip maker posted a lower quarterly profit on Friday and issued a revenue outlook that was a bit weaker than expected.

Also on the Nasdaq shares of UAL Corp. , the parent of United Airlines, pared massive losses to trade down 7.6 percent at $11.37. The shares had initially plunged after a Chicago Tribune story about UAL possibly filing for bankruptcy. UAL said the story was "untrue."

(Additional reporting by Ellis Mnynadu; Editing by Leslie Adler)