U.S. stocks rose on Monday after another round of solid economic reports but pulled off session highs after a Federal Reserve official's warning about banks' loan losses.

The three major indexes had previously risen about 1 percent earlier in the session as stronger-than-expected data on manufacturing and pending home sales spurred a broad-based advance and soothed worries over the recovery's strength.

Industrial and materials stocks rose after the solid numbers on manufacturing activity, with the S&P Industrials index <.GSPI> and the S&P Materials index <.GSPM> both rising 1 percent.

However, the Fed official's critical comments about banks' potential losses on commercial real estate loans caused investors to sell some financial shares. Stocks still managed to close the session with solid gains but could not maintain earlier momentum.

The market has turned from buying on dips to selling on rallies, said Terry Morris, senior vice president and senior equity manager for National Penn Investors Trust Company in Reading, Pennsylvania.

The Dow Jones industrial average <.DJI> gained 76.71 points, or 0.79 percent, to end at 9,789.44. The Standard & Poor's 500 Index <.SPX> climbed 6.69 points, or 0.65 percent, to 1,042.88. The Nasdaq Composite Index <.IXIC> added 4.09 points, or 0.20 percent, to 2,049.20.

Ford Motor Co shares jumped 8.3 percent to $7.58 after the automaker posted a quarterly profit, compared with Wall Street's estimates for a loss, as it cut costs and gained market share, prompting it to boost its 2011 outlook to solidly profitable from break-even.

But shares fell 2.9 percent to $7.36 in extended-hours trading after the automaker proposed a credit facility extension and said that it plans to offer $2 billion in convertible notes and may offer up to $1 billion in stock.

In testimony before a congressional committee on Monday, Jon Greenlee, the associate director of the Fed's Division of Banking Supervision and Regulation, said U.S. banks are at risk for sizable new loan losses, particularly on commercial property, and some banks may not have enough capital to fully cushion against setbacks.

On Tuesday, the Federal Reserve is set to begin its two-day policy meeting.

The KBW Banks index <.BKX> rose 0.9 percent, well off its earlier high that had driven it up more than 3 percent. Citigroup Inc shares fell 2.4 percent to $3.99.

After the closing bell, tool maker Stanley Works said it will buy rival Black & Decker Corp in a $3.46 billion stock deal. [ID:nBNG511551] Black & Decker shares surged nearly 20 percent to $56.57 in extended trade while Stanley Works added 2.9 percent to $46.45.

The S&P 500 is up more than 52 percent since its 12-year closing low on March 9. But the S&P has shown signs of slowing recently and has struggled to maintain rallies, posting declines in the past two weeks.

The Nasdaq eked out a slim gain, weighed down by a 5.1 percent drop in the stock of BlackBerry maker Research In Motion . The stock finished at $55.74, down $2.99. It limited the Nasdaq's gains after an analyst told investors to sell the stock because of increasing competition from other smart phone makers.

(Reporting by Chuck Mikolajczak; Editing by Kenneth Barry)