NEW YORK—Wall Street shook off early doldrums and closed sharply higher Tuesday after another drop in oil prices encouraged investors to set aside financial sector worries and go bargain hunting across the market. The Dow Jones industrial average rose more than 130 points.

Stocks initially fell on uneasiness about the continuing impact of the housing market downturn and the credit crisis on financial company earnings. Disappointing results from American Express Co. and Wachovia Corp. fed those worries.

But a $3 drop in oil—which took crude’s decline in recent weeks to n...