Jones)--U.S. stocks rallied Tuesday as domestic home building jumped to the highest level in nearly two years and another successful Spanish debt auction buoyed investor sentiment.

The Dow Jones Industrial Average gained 257 points, or 2%, to 12024, in morning trade. The blue-chip Dow dropped 100 points on Monday to close at the lowest level of the month.

The Standard & Poor's 500-stock index climbed 26 points, or 2.1%, to 1231. All 10 of the S&P 500's sectors rose, led higher by energy, material and industrial stocks. The technology-heavy Nasdaq Composite rose 57 points, or 2.2%, to 2580.

Trading volume is light ahead of the holidays as many investors are closing their books for the year.

"Sentiment has been awful and volumes are thin," said Jim McDonald, chief investment strategist at Northern Trust. "Any good news can push stocks up pretty quickly in this kind of environment."

Still, the S&P 500 has opened higher in each of the previous six trading sessions. But the early gains have melted each time, according to Bespoke Investment Group.

The market got a boost early Tuesday following a better-than-expected report on the housing sector. U.S. housing starts surged 9.3% in November, rising to the highest level in 19 months. Construction permits also grew. Both are encouraging signs for the housing market, which has struggled for years.

"Housing starts up pretty dramatically is sort of a double-edged sword," said Jack Ablin, chief investment officer at Harris Private Bank. "On the surface it sounds like encouraging news for one of the key sectors of the economy. On the other hand, we have so much inventory that I don't know we need any more coming down the pike."

European markets rose, with the Stoxx Europe 600 up 1.6%, after better-than-expected data out of Germany. The Ifo Institute's closely-watched business confidence index rose in December and exceeded analysts' projections.

Separately, Spain sold EUR5.64 billion ($7.33 billion) of short-term Treasury bills, exceeded the maximum target of EUR4.5 billion. The average yields fell sharply from the previous auction of bills in November. Last week, Spain sold nearly double the amount of longer-term bonds than it had targeted.

Asian bourses bounced, with South Korea's Kospi rising 0.9%, after sliding 3.4% on Monday, and Japan's Nikkei Stock Average tacking on 0.3%. Worries about the implications of the death of North Korean leader Kim Jong Il receded.

Gold futures added 1.2% to $1,615.80 an ounce, while crude oil futures ran up 3.2% to $97.09 a barrel. The U.S. dollar lost ground against the euro and the yen.

Shares of AT&T added 0.8% after the blue chip telecommunications company withdrew its $39 billion bid for T-Mobile USA. AT&T said it would pay $3 billion in cash and turn over some of its wireless spectrum to T-Mobile's owner, Deutsche Telekom, for failing to complete the deal, first announced in March.

Meanwhile, Sprint Nextel gained 1.6%. The stock had dropped 14% on March 21 after AT&T's bid to buy T-Mobile was announced. It has lost more than half its value since the bid was unveiled.

Jefferies shares jumped 6% after the investment bank's quarterly results beat analysts' estimates. The company also reduced its balance sheet by nearly one-fourth and reduced its leverage. The company has been under stress amid worries about its exposure to European sovereign debt.

General Mills slipped 2.6% after the packaged-food company reported fiscal second-quarter earnings that fell short of expectations. ConAgra also reported a double-digit percentage drop in its fiscal second-quarter earnings, although shares rose 4%. Both companies are banking on earnings growth picking up in the second half of their fiscal years.

Navistar surged 9.6% after the commercial and military truck maker's fiscal fourth-quarter earnings were well above forecasts as margins widened.

Red Hat slid 8% after the software provider reported fiscal third-quarter earnings that topped analyst forecasts, but disappointed investors by only matching revenue estimates. The stock had hit a 10-year high at the end of November.

Oracle, which is slated to report fiscal second-quarter results after the close, gained 1.8%.

-By Steven Russolillo, Dow Jones Newswires; 212-416-2180; 
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