Talk of bond insurer rescue spurs late stock rally

By Caroline Valetkevitch

NEW YORK (Reuters) - U.S. stocks rallied late on Friday on news that banks were near an agreement to bail out bond insurer Ambac Financial, a deal that could prevent further damage to the banking industry and credit markets.

After trading in negative territory for most of the session, stocks turned positive in the last half hour after CNBC television reported a bank rescue may come as soon as next week. A source later told Reuters that progress has been made in recent days, but that a deal may still fall through. For details, see

The triple-A credit ratings of Ambac and rival MBIA have come under threat because of their exposure to risky mortgage bonds. That has forced banks to write down the value of holdings insured by the two companies.

Earlier, financial shares had led the decline after Merrill Lynch & Co recommended investors sell Fannie Mae (FNM.N: Quote, Profile, Research, Stock Buzz) and Freddie Mac (FRE.N: Quote, Profile, Research, Stock Buzz), the biggest U.S. home financing companies in anticipation of further deterioration in financial markets.

News of the potential rescue plan caused the Dow to swing from a loss of about 80 points to a 96-point gain by the close, led by a reversal in financial shares.

"The Ambac news turned the entire stock and index futures markets around. The rally almost fed on itself as traders looked to get long wherever they could," said Joe Kinahan, chief derivatives strategist at online brokerage thinkorswim in Chicago.

The Dow Jones industrial average .DJI rose 96.72 points, or 0.79 percent, to end at 12,381.02. The Standard & Poor's 500 Index .SPX gained 10.58 points, or 0.79 percent, to 1,353.11. The Nasdaq Composite Index.IXIC added 3.57 points, or 0.16 percent, to close at 2,303.35.

For the week, the Dow ended up 0.3 percent and the S&P 500 gained 0.2 percent, but the Nasdaq fell 0.8 percent.