* S&P 500 enjoys longest winning streak since January 2011
* Office Depot, OfficeMax in merger talks - source
* Health insurer shares fall on proposed gov't payment rates
* Indexes up: Dow 0.3 pct, S&P 0.5 pct, Nasdaq 0.3 pct
NEW YORK, Feb 19 (Reuters) - U.S. stocks rose on Tuesday as merger activity suggested the market could offer investors still more value even as the S&P 500 and Dow industrials hover near five-year highs.
Equities have resisted a pullback as investors use dips in stocks as buying opportunities. The S&P is up about 7 percent so far in 2013 and has climbed for the past seven weeks in its longest weekly winning streak since January 2011, though most of the weekly gains have been slim.
Office Depot Inc surged 9.4 percent to $5, pulling back from earlier highs after a person familiar with the matter said the No. 2 U.S. office supply retailer was in advanced talks to merge with smaller rival OfficeMax Inc. A deal could come as early as this week.
OfficeMax jumped 20 percent to $12.94 while larger rival Staples Inc shot up 9.4 percent to $14.17 as the best performer on the S&P 500.
More than $158 billion in deals has been announced thus far in 2013. Last week, agreements included the acquisition of H.J. Heinz Co by Berkshire Hathaway, and the sale by General Electric of its remaining stake in NBCUniversal to Comcast Corp.
"Equity investors have to be encouraged by M&A since, if the number crunchers are offering large premiums, that shows how much value is still in the market," said Mike Gibbs, co-head of the equity advisory group at Raymond James in Memphis, Tennessee.
The Dow Jones industrial average was up 37.81 points, or 0.27 percent, at 14,019.57. The Standard & Poor's 500 Index was up 6.84 points, or 0.45 percent, at 1,526.63. The Nasdaq Composite Index was up 9.39 points, or 0.29 percent, at 3,201.42.
U.S. markets were closed on Monday for the Presidents Day holiday.
Health insurance stocks tumbled, led by a 7 percent drop in Humana Inc to $72.50 after the company said the government's proposed 2014 payment rates for Medicare Advantage participants were lower than expected and would hurt its profit outlook.
UnitedHealth Group lost 1.7 percent to $56.37the biggest drag on the Dow. The Morgan Stanley healthcare payor index dropped 1.6 percent.
Express Scripts rose 2.4 percent to $56.87 after the pharmacy benefits manager posted fourth-quarter earnings.
Wall Street's strong start to the year for was fueled by stronger-than-expected corporate earnings, as well as a compromise by legislators in Washington that temporarily averted automatic spending cuts and tax hikes that are predicted to damage the economy.
The compromise on across-the-board spending cuts postponed the matter until March 1, at which point the cuts take effect. Ahead of the debate over the cuts, known as sequestration, further gains for stocks may be difficult to come by.
"If there's no major contention with sequestration, it looks like stocks are prepared to handle it, but until then we'll probably stay in a consolidation period marked by sideways trading with a slow rate of ascent," said Gibbs.
Economic data showed the NAHB/Wells Fargo Housing Market index unexpectedly edged down to 46 in February from 47 in the prior month as builders faced higher material costs.
According to the Thomson Reuters data through Monday morning, of the 391 companies in the S&P 500 that have reported results, 70.1 percent have exceeded analysts' expectations, compared with a 62 percent average since 1994 and 65 percent over the past four quarters.
Fourth-quarter earnings for S&P 500 companies have risen 5.6 percent, according to the data, above a 1.9 percent forecast at the start of the earnings season.