UPDATE 1-Brazil stocks close on biggest rally in two months

(Updates to close)

SAO PAULO, July 15 (Reuters) - Brazilian stocks surged on Wednesday as strong economic data and corporate earnings in the United States lifted investor hopes that a global economic recovery was on the way.

The Bovespa index .BVSP of the Sao Paulo stock exchange rose 4.96 percent to close at 51,296.66, the biggest gain since a 5.01 percent jump on May 18.

Analysts said the better-than-expected results from Intel (INTC.O) and Goldman Sachs Group (GS.N) helped bolster Brazilian shares as investors generally look to American markets to gauge international sentiment and risk-taking.

"The Brazilian markets tend to follow the markets abroad," said Marianna Costa, an economist with Link Investimentos.

In addition, documents on Wednesday showed that U.S. Federal Reserve officials judged that the U.S. economy's contraction was slowing at their June meeting.[ID:nN15341987]

And the New York state factory sector posted its highest reading in more than a year, according to the New York Federal Reserve, showing that New York-area manufacturing contracted only slightly in July.[ID:nN15152354]

The Dow Jones industrial average .DJI advanced 3.07 percent to 8,616.21 points.

Declines in the Bovespa index the past two days also gave shares room to gain on Wednesday, said Alvaro Bandeira, chief economist with brokerage firm Agora.

"The market was a little caught in congestion," Bandeira said. "Now that's loosened up a bit."

Yet the U.S. numbers underscore the continuing fragility of the global economy, Costa said.

"The magnitude of the recession is less today," she said. "But the numbers don't show a vigorous recovery. We're in a preliminary stage of the recovery."

Brazil's currency, the real (BRBY), strengthened 1.73 percent to 1.936 reais to the dollar. The gains reflected an overall decline in the greenback against a basket of major currencies .DXY.

VALE, PETROBRAS

Brazil's mining giant Vale (VALE5.SA) soared 8.33 percent to 30.17 reais. Merrill Lynch said in a July 14 report the company is trading at an 11 percent discount relative to future cash flow generation.

State-controlled energy company Petrobras (PETR4.SA) gained 3.95 percent to 30.76 reais after improved global sentiment led crude oil CLc1 3.78 percent higher.

Vale and Petrobras have the index's highest weighting.

Aircraft maker Embraer (EMBR3.SA) rose 4.52 percent to 8.10 reais. An official from plane maker Boeing (BA.N) said on Tuesday that the U.S. company might be ready to share military technology with Embraer if Boeing wins a bid to build 36 fighter jets for the Brazilian Air Force. [ID:nN14295522]

Steelmaker Usiminas (USIM5.SA) advanced 4.75 percent to 37.04 reais, while Gerdau (GGBR4.SA) jumped 8.16 percent to 20.01 reais.

Airlines TAM (TAMM4.SA) and Gol (GOLL4.SA) also advanced. TAM jumped 7.67 percent to 23.85 reais and Gol 8 percent to 13.50 reais. Merrill Lynch also upgraded shares of both companies this week to buy, citing the positive effect on earnings of a stronger Brazilian currency.

Changes in yields on Brazilian interest rate futures contracts <0#DIJ:> were mixed. The yield for the contract due January 2011 DIJF1, among the most highly traded, rose to 9.78 percent from 9.74 percent.

(Reporting by Luciana Lopez; Editing by Diane Craft)