By Riva Gold and Timothy Puko 

U.S. stocks rebounded Monday, led by a rally in financial shares.

Major U.S. stock indexes had their biggest weekly declines since Brexit after Federal Reserve Chairwoman Janet Yellen said Friday that the case for a rate rise had improved.

The prospect of higher rates tends to strengthen the dollar and weaken stock markets, which have been boosted by years of loose monetary policy. But some said a small increase wouldn't be enough to shake the long-running rally.

"The bull market ends on a recession, it doesn't end on a rate hike," said Michael Antonelli, equity sales trader at Robert W. Baird.

The Dow Jones Industrial Average rose 110 points, or 0.6%, to 18506. The S&P 500 gained 0.6% and the Nasdaq Composite added 0.4%.

Ms. Yellen's statement was later reinforced by Fed Vice Chairman Stanley Fischer, who suggested that the U.S. central bank could act as soon as next month.

Fed-fund futures, used by investors to bet on central bank policy, recently suggested a 30% probability of a rate rise in September, compared with a 21% chance on Thursday, according to data from CME Group. The odds for a rate rise by the end of year were close to 60%.

Financial shares in the S&P 500 rose 1%. Higher interest rates tend to widen the difference between what banks charge on loans and pay on deposits, which should boost earnings.

The sector has lagged behind the broader index this year as investors curbed their expectations for rising rates. Financials are up roughly 2% so far this year, compared with the S&P 500's gain of nearly 7%.

Shares of Wells Fargo rose 2.2% Monday. Bank of America added 0.3%.

The WSJ Dollar Index was flat, following its biggest weekly rise since May.

U.S. crude oil settled down 66 cents at $46.98 a barrel.

The yield on the 10-year Treasury note fell to 1.594% from 1.631% on Friday. Yields move inversely to prices.

U.S. economic data now faces heavy scrutiny ahead of the next FOMC meeting on Sept. 20-21.

Consumer spending rose for the fourth straight month in July, the Commerce Department said Monday. Meanwhile, the personal-consumption expenditures price index, the Fed's preferred inflation measure, was flat in July from the prior month.

Fed officials are watching data like inflation and hiring as they consider the path of interest rates. The monthly jobs report is due Friday.

In the short term, "strong payrolls would be very bad news for equities, " said Florian Ielpo at Swiss fund manager Unigestion. Solid data would strengthen the case for a rate rise in September and call into question a recent rally in emerging markets, which hold large quantities of dollar-denominated debt, he said.

Still, longer term, he said, "when a central bank decides to increase rates, it means the country and companies are doing very well."

The Stoxx Europe 600 inched down 0.2%. The auto sector led losses, while markets in the U.K. were closed for a holiday.

In currencies, the euro was flat against the dollar at $1.1191. The dollar was recently up 0.1% against the yen at Yen101.944 after Bank of Japan Gov. Haruhiko Kuroda also said Saturday that the central bank would take additional monetary easing measures "without hesitation" to achieve its inflation target.

Japan's Nikkei Stock Average rose 2.3%, as a weaker yen tends to help exporters such as auto and electronics parts makers.

Shares elsewhere in Asia fell, however, with Hong Kong's Hang Seng down 0.4% and Australia's S&P ASX 200 down 0.8%. The Shanghai Composite Index was flat.

Write to Riva Gold at riva.gold@wsj.com and Timothy Puko at tim.puko@wsj.com

(END) Dow Jones Newswires

August 29, 2016 15:31 ET (19:31 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.