US STOCKS-Wall St up as Bernanke defends policy, warns on cuts
* S&P 500 bounces back from biggest daily drop since Nov. 7
* Possible stalemate in Italy concerns markets
* Home Depot rises as profit, sales top expectations
* Dow up 0.7 pct, S&P up 0.3 pct, Nasdaq up 0.1 pct
NEW YORK, Feb 26 (Reuters) - U.S. stocks advanced on Tuesday after Federal Reserve Chairman Ben Bernanke defended the Fed's bond-buying stimulus before Congress, but he 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 up slightly and a 5 percent jump in Home Depot lifted the Dow industrials. The PHLX housing sector index rose 2.6 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.
Bernanke's cautiousness was behind a late morning pullback in stocks, according to Robert Pavlik, chief market strategist at Banyan Partners LLC in New York.
He also said concerns about the Fed's next move are unjustified for the moment.
"The Fed isn't going to be pulling back monetary stimulus any time soon," Pavlik said.
The Dow Jones industrial average rose 92.07 points or 0.67 percent to 13,876.24. The S&P 500 gained 4.67 points or 0.31 percent to 1,492.52. The Nasdaq Composite added 1.44 points or 0.05 percent to 3,117.69.
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 among the Nasdaq's biggest percentage decliners 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 6.7 percent to $54.19.
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 financial crisis in Europe.
The FTSEurofirst-300 index of top European shares closed down 1.4 percent. The benchmark Italian index tumbled 4.9 percent.
Dow component Home Depot 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. Its shares jumped 5.5 percent to $67.43.
Macy's shares climbed 3.5 percent to $39.87 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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