Stocks rose in a late rally on Wednesday as unexpectedly strong housing and durable goods data fueled hopes the economy is finally on the mend, offsetting concerns the United States may struggle to fund plans to pull the economy out of recession.

Trading was volatile as poor demand in a U.S. Treasury auction poured cold water on an early rally sparked by the reassuring economic data. But by the end of the session much of that disappointment had worn off, traders said, as investors bet the economy was improving and stocks would continue rising from recent 12-year lows.

Homebuilder shares <.DJUSHB> rose 2.2 percent after new home sales rose at their fastest pace in 10 months in February, adding to recent data showing signs of hope in the battered housing sector. Consumer stocks also rose, with McDonald's Corp gaining 2.9 percent.

Big manufacturers like Boeing Co advanced after U.S. orders for long-lasting manufactured goods unexpectedly rebounded in the same month.

A lot of people want to think we've seen the bottom of the economic cycle, said Cleveland Rueckert, market analyst at Birinyi Associates Inc in Stamford, Connecticut, but they are still skittish, he added in reference to the day's volatility.

The Dow Jones industrial average <.DJI> gained 89.84 points, or 1.17 percent, to 7,749.81. The Standard & Poor's 500 Index <.SPX> rose 7.76 points, or 0.96 percent, to 813.88. The Nasdaq Composite Index <.IXIC> added 12.43 points, or 0.82 percent, to 1,528.95.

The Dow is up 18.37 percent from the 12-year closing low hit on March 9. Twenty of the 30 stocks that make up the blue chip index rose while 10 fell on Wednesday.

Sentiment that the banking system is stabilizing was reinforced after Bank of America Corp Chief Executive Kenneth Lewis, in an interview with the Los Angeles Times, said the bank wants to start repaying $45 billion of federal bailout money next month.

Shares of Bank of America Corp rose 7.7 percent to $7.70 while JPMorgan Chase & Co surged 8.9 percent to $28.56.

Midway through the session, weak demand for $34 billion of U.S. Treasury notes briefly snuffed out the earlier rally, reviving fears about demand for sovereign debt after Britain failed to get enough demand for its debt, the first failed auction for UK debt since 2002.

It is estimated the Treasury will sell about $2 trillion of debt this year, or about one-third of outstanding Treasury debt through the end of 2008. The cash is needed to heal the ailing banking industry and keep the auto industry from collapsing.

International Business Machines fell after news that it is planning to lay off workers in its services unit, considered a strength area for the company. The stock shed 0.4 percent to $97.95.

Shares of homebuilders Toll Brothers rose 3.2 percent to $19.14 and DR Horton added 5.8 percent to $10.06, but both were off session highs.

Trading was active on the New York Stock Exchange, with about 1.77 billion shares changing hands, above last year's estimated daily average of 1.49 billion, while on Nasdaq, about 2.49 billion shares traded, above last year's daily average of 2.28 billion.

Advancing stocks outnumbered declining ones on the NYSE by 2137 to 923 while advancers beat decliners on the Nasdaq by about 1692 to 979.

(Editing by Leslie Adler)