Richard Drew/AP Brokers surround the post trading Time Warner on the floor of the New York Stock Exchange.

Time Warner stock surged 25 5/16 to 90 1/16, leading a broad rally of technology, Internet and media stocks.

Meanwhile, America Online shares jumped as high as 85 in pre-open trading, but fell back in afternoon trading on the New York Stock Exchange as investors digested the terms of the deal, dropping to 71, down 1 7/8.

Overall, the Dow Jones industrial average closed at a record 11,572, while the Nasdaq composite index soared 4.3% to 4049.67, up 167.05, the biggest point gain in Nasdaq's history.

AOL's bold move to acquire Time Warner, gave investors added evidence that the Internet will be one of the most dominant features in the economy of the future, traders said.

``This deal took great vision and courage,'' said Alan Ackerman, senior vice president at Fahnestock & Co. ``It shows that the high valuations that many analysts have been uncomfortable with may be justified.''

The deal helped lift shares of other Internet service providers, as well as entertainment and cable companies, as investors looked ahead to further combinations with media companies. Yahoo! rose 28 13/16 to 436 1/16 and Lycos rose 9 to 79 3/4.

Media companies also rose following news of the AOL deal. Disney rose 4 3/4 to 35 15/16, and Times Mirror rose 2 7/8 to 66 11/16.

Blurring Old and New Media

Overall, the AOL-Time Warner deal could reduce the need for specialized Internet funds by highlighting the increasing exposure of traditional media companies to the Internet universe, managers and analysts added.

``This is a blurring of old and new media,'' said John Wilson, manager of State Street Research's $3 billion Investment Trust. ``It feels like it's a real convergence deal,'' said Wilson, who holds positions in both America Online and Time Warner.

`While the Internet is creating a lot of new wealth and new opportunities, at the end of the day there is going to be some added value for traditional publishers, too,'' he said.

Morningstar Equity Fund analyst Christopher Traulsen said there was no doubt the deal would affect the way institutional investors think about buying Internet and media sector firms.

``As that line continues to blur the question is, does the need for specialized Internet funds diminish,'' Traulsen said.

``A lot of folks don't realize they already have a fair amount of Internet exposure in their portfolio. It doesn't mean you don't need a specialized fund, but it does mean you take a careful look at what you already own,'' he said.

In the short term, the deal focused attention on valuations in the media sector and sparked speculation of other deals linking Internet and publishing.

``It's forcing a reevaluation of the group as a whole,'' said Steve Colton, co-manager of the $440 million Phoenix Oakhurst Growth and Income Fund.

``Everybody's taking a look at who might be next. Some people are saying Yahoo! might look at one of the smaller media companies like Disney `` he said.

Fund managers said the combination of content -- Time Warner's movies, magazines, books and music -- with AOL's distribution channels, offered a lot of opportunities.

``It certainly makes you consider the value in a brand or a customer base that could be tapped in these ventures,'' he said. ''Time Warner has this tremendous customer base and it gives AOL access to, especially on the advertising side with Time Warner's relationships, a whole new set of Internet products.''

Alec Macmillan, manager of the $2 billion Columbia Growth fund, said he liked the deal because it would allow greater revenue per customer without increasing costs.

``My reaction is favorable, definitely favorable,'' Macmillan, who owns both stocks, said. ``It's a good marriage of distribution and content.''

Many money managers also applauded the deal simply because it looked likely to be lucrative for them. Time Warner is held by 1,248 mutual funds and AOL is held by 1,424 funds, according to Morningstar.

Janus Capital, which Thomson Investors Network lists as the largest institutional shareholder in both companies, issued a statement cheering the deal, which it said created a new kind of media company.

``We are very enthusiastic about the Time Warner - AOL merger, which brings together two exceptionally strong management teams,'' said Scott Schoelzel, manager of the Janus 20 fund.

``In combination, these two forward-thinking companies form the model media company for the new millennium,'' he said.

Stock Converted to AOL Time Warner

Under terms of the definitive deal, which has been approved unanimously by both boards of directors, Time Warner and America Online stock will be converted to AOL Time Warner stock at fixed exchange ratios.

Time Warner shareholders will receive 1.5 shares of AOL Time Warner for each share of Time Warner stock they own, while AOL shareholders will receive one share of AOL Time Warner stock for each share of AOL they own.

AOL shareholders will hold 55 percent of the merged company, while Time Warner shareholders will hold 45 percent, even though AOL's market capitalisation prior to the deal was nearly twice that of Time Warner.

— Reuters contributed to this report