Tokyo stocks rose Monday, with the key Nikkei index temporarily surging above 10,000, as relief spread among investors over an apparent deal to raise the U.S. debt ceiling.

The 225-issue Nikkei Stock Average shot up 131.98 points, or 1.34 percent, to close at 9,965.01, after briefly jumping over 2 percent. The broader Topix index of all First Section issues on the Tokyo Stock Exchange finished up 10.33 points, or 1.23 percent, at 851.70.

All 33 sectors on the TSE gained ground, with the banking sector leading gainers, followed by the pulp and paper and air transport sectors.

Stocks snapped a three-day losing streak on optimism that the United States will manage to avert a debt default after U.S. President Barack Obama announced that congressional leaders have agreed to a compromise plan, a day before Tuesday's deadline. However, the plan still must be approved by majorities in both houses of Congress.

"Stocks rose from the outset of trading as U.S. futures edged higher on speculation about a deal," said Yumi Nishimura, senior market analyst at Daiwa Securities Co.

The news also gave exporters an extra boost as it caused the U.S. dollar to rise from the 76.72 yen it briefly hit over the weekend, not far from the postwar low of 76.25 yen hit on March 17. But stocks slightly lost momentum in the afternoon as the dollar did not continue its climb passing the 78 yen line, brokers said.

"Because the dollar's advance was not strong, the Nikkei index lost steam and traded narrowly in the afternoon. Investors also wanted to see how the U.S. market would react," Nishimura said.

Hiroichi Nishi, equity division manager at SMBC Nikko Securities Inc., said even though the U.S. debt ceiling issue appears to be out of the way, "There are still concerns about a slowdown of the U.S. economy, and that continues to be a worrying factor."

Investors braced for U.S. manufacturing data for July from the Institute of Supply Management due out later in the day, and earning reports from major Japanese automakers this week, brokers said.

Honda Motor closed up 45 yen or 1.5 percent at 3,125 yen before announcing its earnings for the April-June quarter, and Toyota Motor rose 15 yen or 0.5 percent to 3,170 yen.

Among exporters, Sony advanced 13 yen or 0.7 percent to 1,960 yen, while Canon climbed 25 yen or 0.7 percent to 3,775 yen.

Megabanks surged, with the Mitsubishi UFJ Financial Group jumping 16 yen or 4.1 percent to 408 yen. Resona Holdings vaulted 19 yen or 5.0 percent to 401 yen.

On the First Section, rising issues outnumbered decliners 1,230 to 313 with 120 others unchanged.

Trading volume on the main section fell to 1,921.23 million shares from Friday's 1,947.72 million. Read More