Shares in several big financial companies bailed out by the U.S. government rose on Wednesday on what analysts said were momentum bets and short-covering on hopes the entities were on the road to recovery.

The run-up that built on Tuesday gains coincided with speculation that regulators might consider banning short-selling in the shares.

The talk, dismissed by the Securities and Exchange Commission as untrue, triggered a so-called short-squeeze as those who bet the stocks would go down covered short positions.

Citigroup Inc rose about 4 percent, while American International Group Inc , jumped 8.3 percent.

This morning we're seeing more momentum. Why? Because this is where deep value will be realized in the event we have a meaningful recovery in the overall economy, said Peter Kenny, managing director at Knight Equity Markets in Jersey City, New Jersey.

Traders also cited short-covering. Shorting has something to do with it. That is going to make the move over exaggerated, said Dave Rovelli, managing director of U.S. equity trading at Canaccord Adams in New York. If a lot of guys want to cover their shorts. then it would turn into a snowball effect.

Shares of AIG shot up $2.66 to $35.50, while Citigroup shares rose as high as $4.07, a 3-month high, while Fannie Mae was up 2 percent at $1.09 and Freddie Mac was up 3.1 percent at $1.32.

Citi option volume also heated up on Wednesday, and was four times greater than usual in midday trading. In all, about 1.13 million calls and 350,000 puts changed hands, according to option analytics firm Trade Alert. On Tuesday, more than 1.4 million Citigroup calls traded.

You could not fail to see the huge call option volume in Citi on Tuesday which could only have been the weight of institutional demand. And that was confirmed in Tuesday's option volume in AIG as well, said Andrew Wilkinson, senior market analyst at Interactive Brokers Group in Greenwich, Connecticut.

(Reporting by Ellis Mnyandu; with additional reporting by Doris Frankel in Chicago and Ed Krudy in New York; editing by Jeffrey Benkoe)

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