Stocks surged more than 2 percent on Tuesday as positive economic data at home and abroad cheered investors after some recent declines, though low volume was seen as exaggerating the market impact.

Cyclical industries, including financials and materials, were among the day's top gainers, though all 10 S&P sectors rose more than 1.5 percent. Materials <.GSPM> led the way, up 3.7 percent, followed by financials <.GSPF>, up 3.4 percent.

The move was a rebound from the previous session, when equities fell more than 1 percent as concerns about the euro zone weighed on bank stocks and sent Bank of America below $5 a share. That stock, a Dow component, rebounded 3 percent to $5.14.

U.S. housing starts and permits for future construction surged to a 1-1/2 year high in November as demand for rental apartments rose. The news reinforced the view that the U.S. economy will continue to see moderate growth.

As we keep getting better news in the U.S., we become something of a haven trade, said Carl Kaufman, who helps manage about $2 billion at the Osterweis Strategic Income Fund in San Francisco. The housing starts were really good, though any small news will have an inordinate impact on us because of how light the trading volume is.

The Dow Jones home construction index <.DJUSHB> jumped 5.2 percent, led by Pultegroup
, the second-largest U.S. homebuilder, up 8.9 percent at $6.09, and MDC Holding , up 6.5 percent at $17.22.

In Europe, the Munich-based Ifo think-tank said German business sentiment rose sharply in December, defying expectations it would decline and underscoring the resilience of Europe's biggest economy.

Short-term financing costs for struggling Spain more than halved as banks lapped up debt at an auction. The firepower is apparently coming from the European Central Bank's first-ever three-year funding tender on Wednesday. Investors hope banks will use the cheap funding to buy debt of fiscally troubled EU nations.

Investors have been focused on how the large southern European economies will refinance debt next year if financing costs remain excessively high. Any sign yields may be easing is seen as a positive for markets.

The Dow Jones industrial average <.DJI> gained 304.51 points, or 2.59 percent, to 12,070.77. The Standard & Poor's 500 Index <.SPX> rose 32.14 points, or 2.67 percent, to 1,237.49. The Nasdaq Composite Index <.IXIC> added 71.74 points, or 2.84 percent, to 2,594.88.

The day's advance narrowed the S&P 500's losses for the year to a little under 2 percent.

Headlines and fluctuating European bond prices continue to spark high volatility. Stocks will be prone to large swings this week on expected low volume due to the upcoming Christmas Day and New Year's Day holidays.

We're quite constructive over the U.S. over the longer term, but this volatility will be with us for a long time, said Michael C. Aronstein, who manages $1.1 billion as president of New York-based Marketfield Asset Management.

The S&P 500 has gained an average of 1.6 percent in the last five days of the year and the first two days in January since 1969, according to the Stock Traders Almanac.

The phenomenon is called the Santa Claus rally. Occasions when the market does not rally during those dates often precede a bear market, the Almanac says.

Networking stocks rose after AT&T Inc dropped its bid for T-Mobile USA, the Deutsche Telekom unit, as investors anticipate spending on wireless equipment will accelerate.

U.S.-listed shares of Alcatel-Lucent surged 13 percent to $1.57 and Juniper Networks Inc climbed 9 percent to $19.75. The NYSE Arca Networking index <.NWX> jumped 5.3 percent. AT&T rose 1.3 percent to $29.11.

(Reporting by Ryan Vlastelica; Editing by Jan Paschal)