US STOCKS-Oil's drop, techs' gain drive market higher

(Updates to close)

*Microsoft shares jump as Icahn seeks Yahoo control

*Oil pullback eases inflation worries

By Caroline Valetkevitch

NEW YORK, May 15 (Reuters) - U.S. stocks rose in light trading on Thursday as a pullback in oil prices eased concerns about inflation and a battle to control Yahoo Inc (YHOO.O) boosted the tech sector.

The S&P 500 and Nasdaq had their highest closes since Jan. 3. News late in the session that key members of the U.S. Senate reached a deal on a housing rescue plan raised hopes late in the session for the beleaguered home market.

Crude oil futures settled slightly lower after sinking to below $122 a barrel during the session. Traders said a surprisingly large increase in U.S. natural gas inventories contributed to crude's fall.

Investors poured into technology stocks after financier Carl Icahn started a proxy battle to get control of Yahoo and force it to strike a deal with Microsoft Corp (MSFT.O).

Retailers benefitted after JC Penney Co Inc (JCP.N) said its earnings in the current quarter could top analysts' forecasts. The outlook drove JC Penney's battered stock up 4.7 percent to $46.32 even though it posted a 50 percent profit drop in the first quarter. For details, see [ID:nN15204424]

"Tech is doing great, led by the big leaders. That's very encouraging and the Nasdaq chart is the strongest one out there right now," said Joe Saluzzi, co-manager of trading at Themis Trading, in Chatham, New Jersey.

The Dow Jones industrial average .DJI shot up 94.28 points, or 0.73 percent, to end at 12,992.66. The Standard & Poor's 500 Index .SPX rose 14.91 points, or 1.06 percent, to 1,423.57. The Nasdaq Composite Index .IXIC climbed 37.03 points, or 1.48 percent, to close at 2,533.73.

Trading volume continued to be very light on the New York Stock Exchange, with about 1.19 billion shares changing hands, well below last year's estimated daily average of roughly 1.90 billion. On Monday, NYSE volume hit its low for the year at 1.05 billion.

June crude CLM8 dipped 10 cents or 0.08 percent to settle at $124.12a barrel. Earlier this week, U.S. crude hit an intraday record at $126.98 a barrel.

"Oil sold off, which was nice, even though it's still very high. That's part of what happened," said Todd Leone. head of listed trading at Cowen & Co. in New York.

In the sweeping housing rescue plan, the two largest U.S. housing finance companies, Fannie Mae (FNM.N) and Freddie Mac (FRE.N), would backstop a government mortgage insurance fund, two industry sources told Reuters. Shares of home builders surged after the news. An index of home builders .DJUSHB rose 3.7 percent.

"In the end, it's all about housing. If you can stabilize that market, that will signal a bottom," Saluzzi said.