Lehman's jump, oil's plunge drives Wall St rally

NEW YORK (Reuters) - U.S. stocks rallied on Friday to score their best daily gain in two weeks as hopes that Lehman Brothers LEH.N may attract a major investor lifted financial stocks while a plunge in oil prices soothed worries about inflation and consumer spending.

The rally helped the broader market erase most of the losses suffered in recent days, leaving the Dow and the S&P 500 only a touch below where they were when the week began.

Shares of Lehman Brothers Holdings Inc LEH.N ended up 5 percent after the Korea Development Bank KDB.UL said the U.S. brokerage was a possible acquisition target. At one point, Lehman's stock was up more than 15 percent.

Lehman is among the U.S. banks whose business has been battered by mounting losses sparked by the U.S. housing slump. Lehman's stock has lost nearly 80 percent of its value this year and the investment bank has taken $7 billion in write-downs. Earlier this week, several brokerages forecast more write-downs to come.

"A potential willing suitor for a company that recently has been all about headline risk is providing solid footing for the (financial) sector," said John Augustine, chief investment strategist at Fifth Third Private Bank in Cincinnati.

"We're getting more constructive on the stock market, and we would say the next big move up for financials would be when you have more willing merger-and-acquisition activity."

The Dow Jones industrial average .DJI shot up 197.85 points, or 1.73 percent, to 11,628.06. The Standard & Poor's 500 Index .SPX rose 14.48 points, or 1.13 percent, to 1,292.20. The Nasdaq Composite Index .IXIC climbed 34.33 points, or 1.44 percent, to 2,414.71.

For the week, the Dow finished down O.3 percent while the S&P slipped 0.5 percent and the Nasdaq fell 1.5 percent.

The market extended gains on Friday after investor Warren Buffett said in a television interview that he has no bets against the dollar and that stocks are more attractive now than a year ago.

Federal Reserve Chairman Ben Bernanke also helped when he said at an annual symposium in Jackson Hole, Wyoming, that the slide in oil prices and a firmer dollar should curb inflation, supporting the U.S. central bank's low interest-rate strategy.

Low interest rates are viewed as positive for stocks because they can improve company profits by lowering costs and stimulating consumer spending.

Oil prices have fallen sharply since hitting a trading record above $147 per barrel in mid-July. On Friday, U.S. crude fell $6.59, or 5.4 percent, to settle at $114.59 per barrel. That was the biggest decline in percentage terms since December 27, 2004, and effectively reversed Thursday's gain of a similar size.

"We had a confluence of positive comments that have lifted stocks, lifted the dollar and caused commodity prices to come in," said Quincy Krosby, chief investment strategist at The Hartford in Hartford, Connecticut. "That's an ideal situation for the equity market."

Lehman's stock rose 5 percent to $14.41 on the New York Stock Exchange. The bank's stock ended 2007 at $65.44 but hit a 52-week low at $12.02 in mid-July.

Shares of the No. 3 U.S. bank, JPMorgan Chase & Co(JPM.N) gained 3.9 percent to $37.67, ranking among the top advancers in both the S&P 500 and the Dow. The S&P financial index .GSPF climbed 3.1 percent.

In an interview on CNBC television, Buffett also said he expects the U.S. government to take action to support troubled home loan financiers Fannie Mae (FNM.N) and Freddie Mac (FRE.N) .

Fannie Mae's stock rose 3.1 percent to $5 on the NYSE.

In contrast, Freddie Mac's shares lost 11.1 percent to $2.81, also on the Big Board.

With lower oil prices, investors also snapped up shares of big manufacturers, technology and retail companies.

Shares of plane maker and U.S. defense contractor Boeing (BA.N) added 3.2 percent to $65.55 and were a major boost for the Dow. Caterpillar (CAT.N), a maker of bulldozers and excavators, gained 2.3 percent to $70.27.

Wal-Mart Stores (WMT.N), the world's biggest retailer, rose 1.6 percent to $59.44.

Among airlines, shares of Delta Air Lines (DAL.N) climbed 9.2 percent to $8.63, while the airline index .XAL shot up 8.2 percent.

On Nasdaq, Apple Inc (AAPL.O), the maker of the iPod and the iPhone, advanced 1.4 percent to $176.79.

Trading volume was low on the New York Stock Exchange, with only about 888.62 million shares changing hands, well below last year's estimated daily average of roughly 1.90 billion, while on Nasdaq, about 1.39 billion shares traded, also below last year's daily average of 2.17 billion.

Advancing stocks outnumbered declining ones by a ratio of about 2.6 to 1 on the NYSE. On the Nasdaq, advancers beat decliners by about 2.5 to 1.

(Additional reporting by Ellis Mnyandu; Editing by Jan Paschal)