Lehman buyout talk, oil, GM lift Wall Street

NEW YORK (Reuters) - Stocks rose on Thursday as a report that major investment bank Lehman Brothers is shopping itself to possible suitors, including Bank of America, drove a last-minute rebound in financial shares.

A nearly $2 retreat in the price of oil also boosted the market, easing concern about consumer and business spending and sending airline and retail shares higher.

General Motors GM.N was another standout, with shares rising more than 11 percent on hopes that Washington may provide a financial lifeline for U.S. automakers. Ford (F.N) jumped nearly 5 percent a share to $4.68.

Financial shares rallied after The Wall Street Journal reported that Lehman LEH.N was courting suitors, including Bank of America (BAC.N).

That sector had been under steady pressure on fears that Lehman would not be able to raise much-needed capital to cover mortgage-related losses. The S&P financial index .GSPF was up 1.5 percent after having fallen around 4 percent.

Lehman shares ended down nearly 42 percent at $4.22, just above a 3-1/2-year low of $3.80 hit earlier. Investor fears that Lehman would fail to raise enough capital to cover its mortgage-related losses have kept it under steady pressure all week. Bank of America shares closed up 2 percent at $33.06.

The market turned sharply because of the "Wall Street Journal story speculating that BofA is involved in takeover discussions with Lehman," said Doug Kass, founder and president of hedge fund Seabreeze Partners Management.

The Dow Jones industrial average .DJI ended up 164.79 points, or 1.46 percent, at 11,433.71. The Standard & Poor's 500 Index .SPX closed up 17.01 points, or 1.38 percent, at 1,249.05. The Nasdaq Composite Index .IXIC finished up 29.52 points, or 1.32 percent, at 2,258.22.

Oil's slide helped shares of energy-intensive companies. An index of airlines .XAL rose 6.4 percent while the Dow Jones Transport Index .DJT added 3.4 percent.

"The decline in oil is helping in the background, but it seems the market is more focused on credit issues and developments around Lehman," said Bobby Harrington, head of block trading at UBS in Stamford, Connecticut.

Among financials, shares of Washington Mutual (WM.N), the biggest U.S. savings and loan, also reversed sharply, ending up 22 percent at $2.83. Earlier, the stock fell below $2 a share on fears that the bank would not be able to raise enough capital to cover its own mortgage losses.

Earlier, the U.S. Treasury Department, asked about the steep fall in Lehman stock, said it was continuing to monitor markets and was keeping in touch with market participants. ID:nWBT009674.

The U.S. Federal Reserve declined to comment on Lehman, a day after the No. 4 U.S. investment bank failed to announce definitive deals to raise capital.

Other financial shares also recovered from severe losses on the day. Shares of American International Group Inc (AIG.N) ended up 0.3 percent at $17.55. Earlier, shares fell more than 12 percent on fears the world's largest insurer may post another loss in the third quarter.

JPMorgan Chase (JPM.N) rose 5.7 percent to $41.65, while Wells Fargo (WFC.N) gained 6.8 percent to $33.85.

GM shares were the second biggest boost for the Dow, rising 11.7 percent to $12.75.

Oil fell $1.71 to $100.87 per barrel, boosting shares of energy-intensive companies such as airlines.

But some investors saw oil's recent sharp slide from a record above $147 a barrel in July as worrisome as it suggests slower growth in the global economy.

That could be bad news for energy shares, said Joe Saluzzi, co-manager of trading at Themis Trading in Chatham, New Jersey.

"People are watching oil, especially after energy's rally yesterday," he said. "They're maybe thinking that group's washed out now."

Shares of Allergan Inc (AGN.N) jumped 10.9 percent to $60.53 after the company said its popular Botox wrinkle smoother also worked as a treatment for adults suffering from chronic migraines, according to clinical data.

About 1.45 billion shares changed hands on the New York Stock Exchange on Thursday, below last year's estimated daily average of roughly 1.90 billion. On Nasdaq, about 2.31 billion shares traded, above last year's average of 2.17 billion.

Advancing stocks outnumbered decliners by about 1.3 to 1 while on the Nasdaq advancers beat decliners about 1.2 to 1.

(Additional reporting by Ellis Mnyandu and Walter Brandimarte; Editing by James Dalgleish)