Bank optimism powers Dow and S&P, but Nasdaq drags

The Dow and S&P 500 stock indexes rose on Monday, extending their recovery from 12-year lows reached this month, as investors became more hopeful that some stabilization may be returning to the banking sector.

But the Nasdaq fell, dragged down by big-cap technology shares due to fears that the recession would continue to hurt business and consumer spending.

Data showing that a gauge of New York State manufacturing activity hit a record low in March also fueled caution.

Banking shares got a boost after Britain's Barclays became the latest bank to say it began 2009 on a strong footing, echoing a refrain heard from the executives of major U.S. banks last week.

Shares of Citigroup rose more than 20 percent to $2.14 on the New York Stock Exchange. Bank of America jumped 10.5 percent to $6.37, while shares of JPMorgan climbed 2.2 percent to $24.27. The KBW bank index <.BKX> rose almost 4 percent.

There's a lack of pessimism right now. A lot of worried investors had a scenario in mind that included a financial meltdown, said Jack Ablin, chief investment officer at Harris Private Bank in Chicago.

Given some of the statements from the banks and some other rhetoric, Fed Chairman Bernanke's appearance in a television interview, maybe investors are taking that meltdown scenario off the table.

The Dow Jones industrial average <.DJI> gained 48.11 points, or 0.67 percent, to 7,272.09. The Standard & Poor's 500 Index <.SPX> added 6.10 points, or 0.81 percent, to 762.65. The Nasdaq Composite Index <.IXIC> dropped 5.70 points, or 0.40 percent, to 1,425.80.

Software maker Oracle Corp was the top drag on Nasdaq, down 4 percent at $14.95, while the semiconductor index <.SOXX> declined 2 percent.

While we may have dodged the bullet in the financial system the fact remains that the economy is going to be weak and spending is going to be slow, Ablin said. You also have sector rotation out of tech into more beaten-down financials.

Federal Reserve Chairman Ben Bernanke, speaking in a taped interview on Sunday, suggested the U.S. recession could last most of the year and said the biggest risk was that the political will needed to fix the fractured financial system could be lacking.

(Reporting by Ellis Mnyandu, Editing by Chizu Nomiyama)