Banks led U.S. stocks sharply higher in a volatile session on Monday, after positive comments on financials from normally bearish analyst Meredith Whitney sparked hopes for the sector ahead of earnings.

The comments offset concerns that CIT Group Inc , a lender to many small- and mid-sized businesses, was struggling to stay afloat.

Whitney upgraded Goldman Sachs to buy this morning, driving its stock up 4.8 percent to $148.69. In comments to CNBC television, Whitney also said bank shares were in for at least a short-term gain of 15 percent and that major financials -- including Bank of America Corp and JPMorgan Chase & Co -- could do well in the second quarter.

The S&P Financial Index.GSPF> rose 4.2 percent, while the Select Sector SPDR Financial ETF climbed 4.3 percent to 11.58.

Bank of America and JP Morgan will release results this week, along with bellwethers such as General Electric , International Business Machines , Intel Corp and Johnson & Johnson ; all are Dow components. Citigroup , a former Dow component, is also set to report.

For today at least, people have optimism about the earnings season, said James Meyer, chief investment officer of Tower Bridge Advisors in West Conshohocken, Pennsylvania.

I think what you're going to hear in the second quarter is that earnings will be better than expected and management is going to express some kind of optimism, though the top line won't be very good, Meyer said.

The Dow Jones industrial average <.DJI> gained 115.93 points, or 1.45 percent, to 8,262.45. The Standard & Poor's 500 Index <.SPX> rose 13.70 points, or 1.56 percent, to 892.83. The Nasdaq Composite Index <.IXIC> added 20.73 points, or 1.18 percent, to 1,776.77

In news that underscored the recession's fallout, commercial lender CIT Group said late Sunday it remained in discussions with regulators on measures to improve its near-term liquidity. In addition, the Wall Street Journal reported the company had hired a law firm to explore a possible bankruptcy filing.

CIT shares plummeted 18.3 percent to $1.25.

The S&P 500 index has rallied as much as 40 percent from a 12-year closing low set in early March, but the drive higher wilted in June as investors searched for economic proof to support the rise.

(Editing by Jan Paschal)