* Nasdaq closes at 14-year high
* Dollar General offers to buy Family Dollar
* Homebuilders' stocks rise after upbeat economic data
* Dow up 1 pct; S&P 500 up 0.9 pct; Nasdaq up 1 pct (Updates to close)
By Akane Otani
NEW YORK, Aug 18 (Reuters) - U.S. stocks surged on Monday, with the Nasdaq closing at a 14-year high as increasing homebuilder confidence and hopes for receding tensions in Russia gave investors reasons to make bigger bets on the equity market.
The Nasdaq Composite ended above 4,508, marking the first time since March 31, 2000, that the tech-heavy index closed above 4,500 points. The S&P 500 extended last week's gains, climbing to within 1 percent of an all-time high.
"You've got good economic data, good corporate earnings and M&A deals moving the market forward, so the market is really coming back strong," said Doug Cote, chief market strategist with Voya Investment Management in New York.
"What you're seeing is defensive investors throwing in the towel and saying, 'I gotta be a part of this.'"
After jumping as much as 20 percent on Friday, the CBOE volatility index or the VIX, a barometer of investor anxiety, fell 6.31 percent to close at 12.32 on Monday.
Homebuilders' stocks rose after the NAHB/Wells Fargo Housing Market Index showed that homebuilder sentiment rose for the third straight month in August.
The PHLX housing sector index climbed 1.7 percent, lifted by a rally in major homebuilders, including PulteGroup Inc, up 2.8 percent at $18.78, and D.R. Horton Inc , up 1.4 percent at $21.13.
Ambiguity lingered in Russia, where tensions with Ukraine have recently rattled markets. Russian officials said on Monday that while all issues related to the country's humanitarian convoy to Ukraine had been resolved, progress had not been made on reaching a cease-fire.
Yet investors' appetite for stocks seemed little dampened by headlines from abroad on Monday. Brent crude oil hit a 14-month low as Kurdish forces made progress against militants in Iraq and the Kiev military reported new successes against pro-Russian separatists in Luhansk.
The Dow Jones Transportation Average climbed 1.7 percent.
Airline stocks soared as oil prices slid. Shares of United Continental Holdings Inc rose 4 percent to $47.84 and shares of Southwest Airlines, the S&P's third-biggest percentage gainer, rose 3.6 percent to $30.82.
The Dow Jones industrial average jumped 175.83 points, or 1.06 percent, to close at 16,838.74. The S&P 500 rose 16.68 points, or 0.85 percent, to 1,971.74. The Nasdaq Composite added 43.39 points, or 0.97 percent, to close at 4,508.31.
A flurry of merger and acquisitions activity gave stocks a boost. Discount retailer Dollar General Corp offered to buy Family Dollar Stores Inc for $8.95 billion, driving Dollar General shares up 11.6 percent to $64.14 and pushing Family Dollar shares up 4.9 percent to $79.81.
The two stocks were the S&P 500's biggest percentage gainers.
Sensors and electrical controls maker Sensata Technologies Holding NV said it would buy the Schrader group of companies in a transaction that valued the business at $1 billion, including debt. Sensata shares rose 5.8 percent to $48.84.
Shares of Urban Outfitters gained 2.4 percent to close at $36.92 ahead of the clothing retailer's earnings report, which were released after the bell. Following the quarterly results, Urban Outfitters shares fell 1.7 percent in extended-hours trading. The youth-oriented clothing retailer beat analysts' estimates on earnings, but said comparable retail segment net sales were flat in its latest quarter.
About 4.5 billion shares traded on all U.S. platforms, according to BATS exchange data, compared with the five-day average of 5.2 billion. (Reporting by Akane Otani; Editing by Chizu Nomiyama, Nick Zieminski and Jan Paschal)