Time Warner led the surge, rising $25.13, or about 39 percent, to $89.88 by the time markets closed for regular trading at 1 p.m. PST. AOL dropped $2.56, or 3 percent, to $71.19.
"It's a great deal," Michael Wallace, an analyst with brokerage UBS Warburg, told Reuters. "It puts AOL and Time Warner leaps and bounds ahead of anyone that's trying to compete with them."
The tech-heavy Nasdaq composite index rose 167.05, or 4 percent, to 4,049.67, fueled by the activity in Internet stocks. The Dow Jones industrial average also jumped to a record high, gaining 49.64, or 0.43 percent, to close at 11,572.20.
Portal giant Yahoo rose $28.81, or 7 percent, to $436.06, and Lycos jumped $9, or 13 percent, to $79.75.
Cable and portal company Excite@Home rose $1.06, or 2 percent, to $40.
Internet service providers MindSpring and EarthLink also rose with the tide. MindSpring rose $1.69, or 6 percent, to $27.69, while EarthLink climbed $2.69, or 7 percent, to $43.69.
Cable TV companies, whose vast networks of cable lines are seen as vital to the expansion of high-speed Internet services, also rose.
Comcast added $5.44, or 13 percent, to $47.81, and Cox Communications rose $6.31, or 12 percent, to $51.50.
AT&T, the top long-distance phone company and No. 2 cable provider behind Time Warner, rose $1.56, or 3 percent, to $50.81.
Shares in Rupert Murdoch's News Corp. rocketed on Australian markets in line with Wall Street media stocks as investors there greeted the AOL-Time Warner merger, according to Reuters.
Reuters contributed to this report.