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US STOCKS-Wall St rallies on Wal-Mart, Verizon

(Updates to early afternoon, changes byline)

*Stocks rally on retail store sales

*Surprise fall in jobless claims buoys cyclical stocks

*Verizon jumps on news of Alltel deal

By Kristina Cooke

NEW YORK, June 5 (Reuters) - U.S. stocks rose the most in a month on Thursday after retailers posted stronger-than-expected May sales and data showed a surprise fall in weekly jobless claims, fueling optimism about the health of the economy.

Deal activity in telecommunications added to the positive tone. Verizon Wireless said it will buy rural mobile phone provider Alltel Corp for $28.1 billion, including debt.

Wal-Mart Stores Inc's WMT.N shares jumped to a four-year high after the world's largest retailer reported a stronger-than-expected increase in sales at U.S. stores open at least a year. It said some of the gains resulted from rebates consumers began receiving in late April under the government's $152 billion economic stimulus package.

Retail shares in the S&P Retail Index .RLX rose 1.6 percent.

Stocks heavily influenced by economic cycles, such as Hewlett-Packard HPQ.N and Alcoa AA.N, responded strongly to data showing the number of U.S. workers filing new jobless benefit claims last week unexpectedly fell. A Morgan Stanley index of cyclical stocks .CYC rose 1.4 percent.

“The market is reacting appropriately to same-store sales and jobless claims. Same-store sales are the first indication that we’ve had that the tax rebates are working,” said Brian Gendreau, investment strategist at ING Investment Management in New York. “It is a very welcome sign. It means that we are on track for a pickup in growth.”

The Dow Jones industrial average .DJI rose 170.74 points, or 1.38 percent, to 12,561.22. The Standard & Poor's 500 Index .SPX was up 20.47 points, or 1.49 percent, at 1,397.67, while the Nasdaq Composite Index .IXIC jumped 37.72 points, or 1.51 percent, to 2,540.86.

Shares of Microsoft Corp MSFT.O rose 1.8 percent to $28.05 while network equipment maker Cisco Systems Inc CSCO.O gained 2.8 percent to $27.52.

Wal-Mart shares rose 3.3 percent to $59.61 and gave the biggest boost to the Dow. The shares had earlier climbed as high as $59.90, a level not seen since 2004.

Costco Wholesale Corp COST.O gave a boost to the Nasdaq, gaining 3.3 percent to $73.17 after the warehouse club also posted a rise in same store sales that topped forecasts.

Shares of Verizon Communications VZ.N, which owns 55 percent of Verizon Wireless, surged 6 percent to $39.18. The acquisition would move Verizon into first place in the U.S. market ahead of AT&T Inc T.N.

Lehman Brothers upgraded the U.S. airline sector, saying industry restructuring was coming at an accelerated pace. UAL UAUA.O, the parent of United Airlines, soared 11.6 percent to $10.20 on Nasdaq. Northwest Airlines Corp NWA.N advanced 15.7 percent to $8.11 on the NYSE.

Several airlines are reducing work forces and domestic fleets as the industry grapples with soaring fuel costs and a weakening economy.

Continental Airlines Inc CAL.N rose 6.3 percent to $15.40 after it said late Thursday it would cut 3,000 jobs, or about 6.5 percent of its work force, and retire 67 older planes as it scales down in the face of rising fuel prices.

Oil gained $2.63 to $124.92 a barrel, helping to prop up energy stocks. Exxon Mobil XOM.N gave the biggest lift to the S&P 500, rising 2.3 percent to $87.69, while shares of rival Chevron Corp CVX.N gained 2.4 percent to $98.35. (Editing by Kenneth Barry)