The S&P 500 hit a 17-month closing high as rising bank shares led a late rally that lifted stocks on Thursday, more than offsetting worries China may move to cool its overheating economy.

Financial stocks added to recent sharp gains, helped in part by the possibility new banking regulations being studied by Congress could be watered down. The KBW bank index <.BKX> rose 1.7 percent to a fresh 16-month high of 50.92.

There's an assessment now that the reform proposal will be diluted and will not have all the strident language that was initially thought, said Quincy Krosby, market strategist at Prudential Financial in Newark, New Jersey.

Citigroup shares, up 5.6 percent to $4.18, were among the top gainers, after its chief executive told investors he views the troubled bank as well positioned to return to sustained profitability.

The Dow Jones industrial average <.DJI> gained 44.51 points, or 0.42 percent, to 10,611.84. The Standard & Poor's 500 Index <.SPX> rose 4.63 points, or 0.40 percent, to close at 1,150.24. The Nasdaq Composite Index <.IXIC> added 9.51 points, or 0.40 percent, to 2,368.46.

Wall Street traded flat for most of the session as Chinese inflation spiked to a 16-month high and offered fresh arguments for monetary tightening in the world's third-largest economy.

Diversified manufacturer 3M CO dipped 0.4 percent to $81.26.

The Nasdaq Composite rose for a sixth straight day, matching a streak that ended on February 18, with online retailer up 2.4 percent at $133.58, and leading gains in the tech-heavy index.

Other retailers also posted big gains a day ahead of the monthly retail sales data from the U.S. Department of Commerce. The S&P retail index <.RLX> added 0.8 percent.

The U.S. trade deficit narrowed unexpectedly as oil imports fell to their lowest level since February 1999, but exports slipped after rising in the eight previous months.

The S&P midcap index <.MID> rose for a twelfth consecutive day for the first time since 1996, according to data from Birinyi Associates.

About 8.1 billion shares traded on the New York Stock Exchange, the American Stock Exchange and Nasdaq, below last year's estimated daily average of 9.65 billion.

Advancing stocks outnumbered declining ones on the NYSE by a ratio of about 3 to 2, while on the Nasdaq, about 15 stocks rose for every 11 that fell.

(Reporting by Rodrigo Campos; Editing by Jan Paschal)