Stocks rebounded after a wobbly start on Tuesday on cautious optimism that the U.S. Federal Reserve's policy panel would add more monetary stimulus to a flagging economic recovery,

At the two-day meeting that started Tuesday, the Fed is expected to try to push already-low long-term interest rates even lower by tilting toward longer-duration bonds in its portfolio, a move known as Operation Twist.

The rally was broad-based, though defensive sectors such as utilities, telecommunications and health care were up more sharply, leading the way higher.

The risk trade is back on, but again the volume is very very light, so it's hard to say that this is the start of a new trend or anything, said Neil Massa, senior equity trader at Manulife Asset Management in Boston. It just seems like people are cherry picking until tomorrow's (Federal Open Market Committee) meeting ends and the Fed does what everyone is expecting them to.

Massa warned, however, the rally could be short-lived as investors typically buy the rumor and sell the fact, and may be tempted to take profits Wednesday after a strong performance all last week.

The Dow Jones industrial average <.DJI> rose 127.26 points, or 1.12 percent, at 11,528.27. The Standard & Poor's 500 Index <.SPX> was up 14.89 points, or 1.24 percent, at 1,218.98. The Nasdaq Composite Index <.IXIC> added 25.71 points, or 0.98 percent, at 2,638.54.

Apple Inc again jumped to an all-time intraday high, up more than 2 percent to hit $422.00, before easing to $420.19, up 2 percent. Wedbush Securities added the stock to its best ideas list.

The market shrugged off Standard & Poor's downgrade of Italy's credit rating by one notch, an unexpected move that increased strains on the already stressed euro zone.

In the latest economic data, U.S. housing starts declined more than expected in August as groundbreaking for both single-family and multi-family units decreased.

(Reporting by Claire Sibonney)

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