Stocks rose on Monday as investors bet that the government's stress tests won't force banks to raise as much capital as originally thought and housing data fueled hopes that the economic slump is abating.

Bank stocks were among the standouts, with Citigroup up nearly 5 percent to $3.11 and Bank of America climbing 5.4 percent to $9.17. Wells Fargo jumped 13 percent to $22.15.

The surge sent the S&P 500 <.SPX> to within striking distance of breaking even on the year. The index has now gained more than 32 percent since hitting a 12-year low on March 9.

Although final stress test results are expected to be released on Thursday, investors bet that they would show banks do not need a larger financial cushion. That outcome would minimize the dilution of current shareholders and avoid giving the government a bigger stake in the banks.

These companies kind of reflect a lot of dilution already, so there's not a lot of concern, said Owen Fitzpatrick, head of U.S. Equity Group at Deutsche Bank Private Wealth Management in New York.

When you go back maybe six months ago, people were reacting in a negative way to anyone that was looking to dilute shareholders, but here people have kind of priced that in, to a large extent, in these banks.

The Dow Jones industrial average <.DJI> rose 172.04 points, or 2.09 percent, to 8,384.45. The Standard & Poor's 500 Index <.SPX> climbed 19.67 points, or 2.24 percent, to 897.19. The Nasdaq Composite Index <.IXIC> shot up 29.27 points, or 1.70 percent, to 1,748.47.

Fresh data fueled investors' hopes that the economic slump may be easing as pending sales of existing homes rose unexpectedly in March, sending shares of home builders higher.

Lennar jumped 8.3 percent to $10.24, while Toll Brothers gained 4.6 percent to $20.37, and D.R. Horton added 8.1 percent to $13.37.

The Dow Jones home construction index <.DJUSHB> rose 7.3 percent. The broad S&P 500 is at its highest level since early January and is less than 1 percent away from turning positive for the year.

The first-quarter earnings reporting season is winding down, but Sprint Nextel Corp gave investors something to cheer when it posted a surprise quarterly operating profit.

Sprint shares jumped 12 percent to $5.22.

Shares of Boeing Co rose 1.9 percent to $41.97 after the plane maker reaffirmed maiden flight plans for its 787 Dreamliner. The stock was among the Dow's biggest boosts, along with diversified manufacturer United Technologies ,which rose 3 percent to $51.03.

On Nasdaq, shares of Apple Inc were a top boost, rising 3.5 percent to $131.69.

Any news that points to more stabilization in the banking sector would be a positive for stock investors since authorities have said shoring up the financial system is essential in reviving the recession-hit economy.

The government has assessed 19 major U.S. financial institutions to ensure they have sufficient capital to withstand the recession.

Bloomberg reported on Monday that Citigroup is looking to raise any additional capital it might need from private investors rather than giving more control to the government.

The Financial Times, citing people close to the situation, reported that Bank of America Corp is working on plans to raise more than $10 billion in fresh capital, but the bank denied it had such plans.

(Editing by Padraic Cassidy)

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