Stocks eked out a small gain on Tuesday as investors' enthusiasm over a tax cut extension deal was short-circuited by rising bond yields and reports regulators were stepping up an insider-trading probe.

The S&P 500 hit a two-year intraday high after President Barack Obama forged the deal with Republicans to renew Bush-era tax cuts.

But the rally fizzled late as the yield on the 10-year note hit its highest level since June 2009 and debt prices fell sharply.

The smashing that (bonds) are taking today is disconcerting, said Peter Boockvar, equity strategist at Miller Tabak & Co in New York.

The spike in interest rates could be enough to stop the equity rally in its tracks.

The rise in yields added to anxiety from news the U.S. Securities and Exchange Commission has issued more than a dozen subpoenas in its investigation of insider trading on Wall Street, potentially undermining public confidence in the markets.

Optimism over the tax agreement sent the S&P 500 to a new intraday two-year high and above a key technical measure, but the index retreated, confirming the 1,228 level remains a strong resistance point.

Analysts said the lofty heights recently attained by stock indexes may have also given investors reason to pause due to skittishness.

The market has had a nice run. Investors are a little nervous about the move we just had and are looking for any type of reason to sell off, said Angel Mata, managing director of listed equity trading at Stifel Nicolaus Capital Markets in Baltimore.

The Dow Jones industrial average <.DJI> dropped 3.03 points, or 0.03 percent, to 11,359.16. The Standard & Poor's 500 Index <.SPX> added 0.63 points, or 0.05 percent, to 1,223.75. The Nasdaq Composite Index <.IXIC> gained 3.57 points, or 0.14 percent, to 2,598.49.

Volume surged on Tuesday as more than 11 billion shares changed hands on the New York Stock Exchange, NYSE Amex and Nasdaq. That compared with the year-to-date estimated daily average of 8.63 billion.

The CBOE volatility index <.VIX> closed at 17.99 -- its lowest level since April and below a key technical resistance at 18.

Citigroup shares rose 3.8 percent to $4.62 on massive volume after the U.S. government sold its remaining stake in the company. The move could lead to an increased weighting for the bank in the S&P 500 as the company moves to a 100 percent float, according to Credit Suisse.

Credit Suisse estimated that portfolios following the S&P may need to buy up to 375 million Citigroup shares, although the timing of the purchases was uncertain. Citigroup volume totaled nearly 3.1 billion shares, roughly 30 percent of the total volume of 10.9 billion.

3M Co shares fell 3.1 percent to $84.19. The Dow component forecast 2011 profit that could top expectations but issued an outlook for sales growth that was lower than some analysts expected.

In other corporate news, natural gas distributor Nicor Inc climbed 4.3 percent to $48.79 after it agreed to be acquired by rival AGL Resources Inc for $2.4 billion. AGL shed 5.8 percent to $34.

Talbots Inc plunged 22.7 percent to $8.

Advancing stocks outnumbered declining ones on the NYSE by 1,496 to 1,485, while on the Nasdaq, advancers beat decliners 1,485 to 1,162.

(Reporting by Chuck Mikolajczak; Additional reporting by Rodrigo Campos; Editing by Kenneth Barry)

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