US STOCKS-Wall St rebounds, erases week's losses with Russia news
* End of Russian military drills near Ukraine border lifts markets
* S&P gains, posts best day since March 4
* Indexes up: Dow 1.1 pct, S&P 1.1 pct, Nasdaq 0.8 pct
* Shares of defense companies up (Adds Raytheon, Northrup Grumman, Lockheed)
By Akane Otani
NEW YORK, Aug 8 (Reuters) - The S&P and Dow both posted their best day since March on Friday, with the market buoyed by news that Russia was ending military drills near the Ukrainian border, while investors overlooked U.S. air strikes in Iraq.
The gains helped major averages erase the week's losses as buying intensified as the day came to a close. The CBOE market volatility index fell 5.7 percent to 15.71 in a sign of reduced investor uncertainty.
Stocks have been under pressure of late as investors, worried about high valuations and uncertainty around the world, pulled back from riskier assets. Before Friday's rally, the S&P 500 had given up more than 4 percent while the small-cap Russell was down 7 percent over the past four weeks.
Markets rallied after Russia's Defense Ministry said Friday it had finished military exercises in southern Russia, which the United States had criticized as a provocative step amid the Ukraine crisis.
"The market hates uncertainty, and when it doesn't have enough information about how badly an event could impact the economy, it tends to take the worst-case scenario and people sell off," said Malcolm Polley, president and chief investment officer of Stewart Capital Advisors in Indiana, Pennsylvania.
"With the news of the de-escalating in Russia, and also with the administration saying exactly what they are doing in Iraq, it's helped clear up some uncertainty in the market."
Earlier on Friday, the United States carried out air strikes targeting Islamic State fighters marching on Iraq's Kurdish capital. The strikes were the first authorized on Iraq since President Barack Obama pulled American troops out in 2011.
The Dow Jones industrial average rose 182.52 points, or 1.12 percent, to 16,550.79. The S&P 500 ended up 21.84 points, or 1.14 percent, to 1,931.41. The Nasdaq Composite added 36.02 points, or 0.83 percent, to 4,370.99.
For the week, the Dow rose 0.4 percent, the S&P 500 gained 0.3 percent, and the Nasdaq rose 0.4 percent.
Utilities were the day's biggest gainer among S&P sectors, rising 2 percent, followed by a 1.7 percent increase in energy shares.
Shares of defense companies also performed well, with Lockheed Martin Corp ending the day up 1.8 percent to $165.80, Raytheon Co up 2.4 percent to $91.61 and Northrop Grumman Corp up 2.1 percent to $122.86.
U.S.-traded shares of Tekmira Pharmaceuticals Corp surged 45.1 percent to $20.70 after the U.S. Food and Drug Administration cleared the company's experimental Ebola treatment for potential use in humans. More than 28.4 million shares changed hands, the busiest day of trading in company history.
About 5.5 billion shares traded on all U.S. platforms, according to BATS exchange data, compared with the five-day average of 6.5 billion. (Editing by Bernadette Baum, Leslie Adler and Lias Shumaker)