Stocks rose sharply in New York yesterday, energised by another strong day on foreign markets, some encouraging profit reports by major companies, and news that two drug manufacturers are considering the biggest merger in history.

On Wall Street, the Dow Jones industrial average rose 119.57 points - or 1.54 per cent - to 7,873.12.

Broader measures also rallied, placing some within striking distance of record terrain.

Although the gains on Asian markets were fairly modest, the continuing recovery set a positive tone for Wall Street's return from a three-day weekend.

The focus quickly shifted to domestic affairs, however, with numerous big-name companies reporting on their results for the final three months of 1997 and drug stocks rallying on news that SmithKline Beecham and American Home Products are discussing a merger.

Advancing issues outnumbered decliners by a two-to-one margin.