Stocks edged higher on Tuesday, led by the financial sector as economic data pointed to a sustained if slow recovery from the recession, taking the Dow and the S&P 500 to nine-month highs.

The Nasdaq achieved its highest close since early October.

U.S. consumers spent more in June, though partly because of rising gasoline prices, and contracts to buy used houses rose more than expected and for a fifth-straight month. But income suffered its biggest drop in four-and-a-half years, underscoring fears over growing unemployment.

The S&P financial index <.GSPF> rose 2.1 percent as the housing data was a positive for the sector, while the Dow Jones Home Construction index <.DJUSHB> gained 2.5 percent.

The one thing that's driving this market more than anything is the fear that as an investor, you're missing out on something big, said Angel Mata, managing director of listed equity trading at Stifel Nicolaus Capital Markets in Baltimore.

There's so much power to this rally that a little move down is a correction, and invites more investors in, he said.

Indexes opened lower and seesawed throughout the session, but a late run-up helped extend the earnings-driven rally.

Stocks soared about 40 percent from March to May but the surge wilted in June. Gains resumed at the start of the second-quarter earnings season. The broad S&P 500 index is up 48.6 percent from its 12-year closing low on March 9.

On Tuesday, the Dow Jones industrial average <.DJI> gained 33.63 points, or 0.36 percent, to close at 9,320.19. The Standard & Poor's 500 Index <.SPX> rose 3.02 points, or 0.30 percent, to 1,005.65. The Nasdaq Composite Index <.IXIC> edged up 2.70 points, or 0.13 percent, to end at 2,011.31.

KRAFT CRUMBLES, CATERPILLAR CLIMBS

After the closing bell, Dow component Kraft Foods Inc reported a rise in quarterly profit that exceeded analysts' expectations. But its stock, which had gained almost 12 percent in July, fell 2.1 percent to $27.73 in extended trading. On the New York Stock Exchange, Kraft closed at $28.34, up 0.5 percent before the company, which makes Oreo cookies and Kraft cheese, released earnings.

During the regular session, shares of Dow component Caterpillar , a heavy equipment maker, jumped 6.1 percent to $47.89 after the company's CEO gave an upbeat earnings presentation and said that in future recessions the company would be able to report annual earnings well above this year's forecast.

PepsiCo Inc
shares rose 5.1 percent to $59.06 after it said it agreed to buy Pepsi Bottling Group Inc
and PepsiAmericas Inc
in a deal worth $7.8 billion, as the second-largest soft drink maker behind Coca-Cola Co seeks to cut costs and boost profits in North America.

Shares of Pepsi Bottling gained 8.5 percent to $36.49 and PepsiAmericas jumped 9 percent to $28.50.

Earlier, two of the largest U.S. mall owners, Simon Property Group Inc and Macerich Co , posted disappointing results as consumers remain reluctant to spend, but the companies' CEOs said retail declines appear to be abating and shares jumped.

Macerich shares shot up 7 percent to $21.45 while Simon Property, up 6.9 percent at $60.91, was the top points gainer in the Dow Jones Equity REIT index <.DJR>, which jumped 5.3 percent.

Volume was light on the New York Stock Exchange, where about 1.25 billion shares changed hands, below last year's estimated daily average of 1.49 billion. But on the Nasdaq about 2.29 billion shares traded, slightly above last year's daily average.

Advancers outnumbered decliners on the NYSE by a ratio of about 3 to 2, while on the Nasdaq, about five stocks rose for every four that fell.

(Editing by Jan Paschal)