US STOCKS-Dow, S&P rise as Bernanke defends policy, warns on cuts
* S&P 500 bounces back from biggest daily drop since Nov. 7
* Fed chief says bond-buying benefits are clear
* Home Depot rises as profit, sales top expectations
* Dow up 0.5 pct, S&P up 0.1 pct, Nasdaq off 0.2 pct
NEW YORK, Feb 26 (Reuters) - U.S. stocks mostly rose on Tuesday after Federal Reserve Chairman Ben Bernanke defended the Fed's bond-buying stimulus before Congress, but warned forced spending cuts that could be triggered this week represented a headwind for the economy.
Gains in homebuilders and other consumer stocks, following strong economic data, kept the S&P 500 nearly unchanged, while a 5 percent jump in Home Depot lifted the Dow industrials. The PHLX housing sector index rose 2 percent.
Stocks hit session highs shortly after Bernanke, in testimony before the Senate Banking Committee, strongly defended the Fed's bond-buying stimulus program that has been essential for the stock market's recovery.
However, he also urged lawmakers to avoid sharp spending cuts set to go into effect on Friday, which he warned could combine with earlier tax increases to create a "significant headwind" for the economic recovery.
"He really came down foursquare on the bearish camp with respect to the potential economic impact of these cuts. That's a surprise, and that's probably why the market's a little nervous right now," said Michael Jones, chief investment officer of Riverfront Investment Group in Richmond, Virginia.
The Dow Jones industrial average rose 74.64 points or 0.54 percent to 13,858.81. The S&P 500 gained 1.78 points or 0.12 percent to 1,489.63. The Nasdaq Composite dropped 5.84 points or 0.19 percent to 3,110.41.
The S&P 500 failed to move above 1,500, a closely watched level that was technical support until recently, but could now become a hurdle.
Cable network AMC Networks was the Nasdaq's biggest percentage decliner after the home of popular shows such as "The Walking Dead" and "Mad Men" reported a quarterly profit way below analysts' estimates. Its stock fell 7.4 percent to $53.77.
Equities continued to be weighed by concerns about a stalemate in Italy after a general election failed to give any party a parliamentary majority, posing the threat of prolonged instability and European financial crisis.
The FTSEurofirst-300 index of top European shares unofficially closed down 1.3 percent at 1,150.58. The benchmark Italian index tumbled 4.9 percent.
Dow component Home Depot Inc was the top gainer in both the Dow and the S&P 500 after the world's largest home improvement chain reported adjusted earnings and sales that beat expectations. Home Depot's shares jumped 5.5 percent to $67.46.
Macy's Inc shares climbed 2.8 percent to $39.60 after the department-store chain stated it expects full-year earnings to be above analysts' forecasts because of strong holiday sales.
Economic reports that showed strength in housing and consumer confidence also supported stocks.
U.S. home prices rose more than expected in December, according to the S&P/Case-Shiller index. Consumer confidence rebounded in February, jumping more than expected, and new-home sales rose to their highest in 4-1/2 years.
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