Wall Street rebounded from a three-day sell-off on Wednesday as comments from Federal Reserve Chairman Ben Benanke raised hopes that there could be further stimulus for the U.S. economy if needed.

All three major U.S. stock indexes rose more than 1 percent shortly after Bernanke's comments while the CBOE Volatility Index <.VIX>, Wall Street's fear gauge, fell 7.6 percent to 18.37. Over the past three days, the S&P 500 had lost about 2.3 percent on concerns about Europe's debt crisis.

He was pretty specific, more than he had ever been, and that excited the market. He didn't say that they would exercise the stimulus, but it is clear that they discussed the issue, and that there are options to take, if necessary, said Tim Ghriskey, chief investment officer of Solaris Asset Management in Bedford Hills, New York.

Bernanke told the House Financial Services Committee:

The possibility remains that the recent economic weakness may prove more persistent than expected and that deflationary risks might reemerge, implying a need for additional policy support.

His comments, made on the first day of his semiannual testimony to members of Congress about the U.S. economy and monetary policy, came as investors were divided over whether the Fed would introduce another round of stimulus to boost the economy, especially after June's dismal jobs report. The Fed's easy money policies since 2008 have been fueling the stock market's rally.

The Dow Jones industrial average <.DJI> was up 146.03 points, or 1.17 percent, at 12,592.91. The Standard & Poor's 500 Index <.SPX> was up 16.06 points, or 1.22 percent, at 1,329.70. The Nasdaq Composite Index <.IXIC> was up 39.01 points, or 1.40 percent, at 2,820.92.

Energy and material stocks were the top gainers. The S&P energy sector index <.GSPE> shot up 1.8 percent and the S&P materials sector index <.GSPM> rose 1.7 percent.

Wall Street got an early boost from overseas data that showed China's economy, as measured by its gross domestic product, grew faster than expected in the second quarter.

But there was still caution over developments in Europe. Moody's downgraded Ireland's debt to junk late on Tuesday and said Ireland was likely to follow Greece in needing a second bailout. Irish bond yields jumped to record highs.

News Corp shares jumped 6.5 percent to $16.34 after the company announced that it has withdrawn a $12 billion bid to buy the 61 percent of broadcaster BSkyB it does not already own. News Corp is at the center of allegations that one of its tabloid newspapers committed criminal acts.

Electronic Arts Inc , the video game publisher, is buying PopCap Games in a deal worth up to $1.3 billion as it tries to ramp up its social and casual games portfolio and better compete with Zynga Inc., known for Farmville, a game popular with Facebook fans. Shares of Electronic Arts shed 0.3 percent to $24.10.

(Reporting by Angela Moon; Editing by Jan Paschal)