U.S. stocks rallied on Monday, driving the S&P 500 into positive territory for the year as investors bet banks' capital shortfalls may be manageable and housing data fueled hopes the recession is easing.

Bank stocks were the standouts, with Citigroup up 7.7 percent at $3.20 and Bank of America climbing 19.3 percent to $10.38. Wells Fargo jumped 23.7 percent to $24.25, while JPMorgan shot up 10.2 percent to $35.79.

The S&P 500 is now up 34 percent from its 12-year closing low on March 9. The KBW Bank index <.BKX> leaped nearly 15 percent and is up 88 percent since early March when many thought the government was on the brink of nationalizing several big banks.

Aside from reports suggesting bank balance sheets need less shoring up than feared just a few months ago, White House comments that the Obama administration did not see a need right now to ask Congress for more bank bailouts also pushed the sector higher.

Going into the stress tests, nobody expected anything positive to come out of this, said Dan Faretta, senior market strategist at Lind-Waldock, a retail brokerage firm, in Chicago.

If there's a situation where we don't have to ask for more money, that's going to be very positive for these markets.

The Dow Jones industrial average <.DJI> rose 214.33 points, or 2.61 percent, to 8,426.74. The Standard & Poor's 500 Index <.SPX> gained 29.72 points, or 3.39 percent, to 907.24 -- its first close above the 900 level since early January. The Nasdaq Composite Index <.IXIC> climbed 44.36 points, or 2.58 percent, to 1,763.56.

The broad S&P 500 turned positive for the year 2009, but it is still off 42 percent from its October 2007 record high.

All but one of the Dow's 30 stocks ended in positive territory.

Although final stress test results are expected to be released on Thursday, investors bet they will show banks do not need a larger financial cushion. That outcome would minimize the dilution of current shareholders' equity and avoid giving the government a bigger stake in the banks.

HOME BUILDERS' SHARES JUMP

On the economic front, fresh data fueled investors' hopes that the recession may be easing as pending sales of existing homes rose unexpectedly in March, sending shares of home builders higher.

Lennar jumped 9.3 percent to $10.34, while Toll Brothers gained 6.5 percent to $20.73, and D.R. Horton added 9.1 percent to $13.49.

The Dow Jones home construction index <.DJUSHB> rose 9 percent.

The first-quarter earnings reporting season is winding down, but Sprint Nextel Corp gave investors something to cheer when it posted a surprising quarterly operating profit. Sprint shares jumped 7.1 percent to $5.

The burgeoning optimism about the economy underpinned gains in the shares of big manufacturers, with diversified manufacturer United Technologies up 3.4 percent at $51.22. Shares of Boeing Co rose 2.3 percent to $42.15 after the big U.S. aircraft maker reaffirmed maiden flight plans for its 787 Dreamliner. The stock helped lift the Dow.

On Nasdaq, shares of Apple Inc gave the biggest boost, rising 3.8 percent to $132.07.

Any news that points to more stabilization in the banking sector will be a positive for stock investors since authorities have said shoring up the financial system is essential in reviving the recession-hit economy.

The government has assessed 19 major U.S. financial institutions to ensure they have sufficient capital to withstand the recession.

Bloomberg reported on Monday that Citigroup is looking to raise any additional capital it might need from private investors rather than giving more control to the government.

The Financial Times, citing people close to the situation, reported that Bank of America is working on plans to raise more than $10 billion in fresh capital, but the bank denied it had such plans.

Trading volume was active on the New York Stock Exchange, with about 1.71 billion shares changing hands, above last year's estimated daily average volume of 1.49 billion, while on Nasdaq, about 2.56 billion shares traded, above last year's daily average of 2.28 billion.

Advancing stocks outnumbered declining ones on the NYSE by a ratio of more than 5 to 1, while on the Nasdaq, about seven stocks rose for every two that fell. (Editing by Jan Paschal)

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