Stocks rallied nearly 3 percent on Tuesday as investors bought surging banks, homebuilders and networking companies, though low volume was seen as amplifying the market's move.

Investors jumped on a banking sector that was already riding high, extending gains after the U.S. Federal Reserve released new capital proposals that turned out to be less onerous than the market feared.

The KBW Banks index <.BKX> leaped 4.1 percent while JPMorgan Chase & Co was up 5 percent to $32.22 and Wells Fargo & Co added 4.6 percent to $26.47.

Investors have been looking for clarity on the regulatory outlook, and I don't think these rules are so strict that we should expect anything like significant dividend cuts, said Matt McCormick, a money manager at Cincinnati-based Bahl & Gaynor Inc.

Homebuilders also gained on strong housing figures. The Dow Jones home construction index <.DJUSHB> jumped 6 percent, led by Pultegroup

, the second-largest U.S. homebuilder, up 10 percent at $6.15, and MDC Holding , up 7.3 percent at $17.35.

Networking companies completed the grab bag of diverse sectors seeing the biggest gains. Those stocks rallied after AT&T Inc dropped its bid for T-Mobile USA, the Deutsche Telekom unit, as investors anticipate spending on wireless equipment will accelerate.

U.S.-listed shares of Alcatel-Lucent surged 13 percent to $1.57 and Juniper Networks Inc climbed 9.1 percent to $19.76. The NYSE Arca Networking index <.NWX> jumped 5.9 percent. AT&T rose 1.3 percent to $29.11.

The Dow Jones industrial average <.DJI> was up 335.73 points, or 2.87 percent, at 12,103.58. The Standard & Poor's 500 Index <.SPX> was up 35.95 points, or 2.98 percent, at 1,241.30. The Nasdaq Composite Index <.IXIC> was up 80.59 points, or 3.19 percent, at 2,603.73.

After the market closed, shares of Oracle Corp slumped 7.7 percent to $26.92 in extended trading. The company reported software and hardware sales that missed its own forecasts.

U.S. housing starts and permits for future construction surged to a 1-1/2 year high in November as demand for rental apartments rose. The news reinforced the view that the U.S. economy will continue to see moderate growth.

Cyclical industries like materials were among the day's top gainers, though all 10 S&P sectors rose more than 1.5 percent. Materials <.GSPM> climbed 4.1 percent while energy <.GSPE> advanced 4 percent alongside a 3.6 percent jump in crude prices.

The day was the best for the S&P 500 since November 30, and narrowed the index's losses for the year to 1.3 percent.

Headlines and fluctuating European bond prices continue to spark high volatility. Stocks will be prone to large swings this week on expected low volume due to the upcoming Christmas and New Year's Day holidays.

From a short-term point of view, we were probably due for a bounce given recent losses, but I don't think we would see a move of this magnitude without the light volume, said Michael Matousek, senior trader at U.S. Global Investors Inc., which manages about $3 billion in San Antonio.

About 6.83 billion shares traded on the New York Stock Exchange, the American Stock Exchange and Nasdaq, below last year's daily average of 8.47 billion.

Short-term financing costs for struggling Spain more than halved as banks lapped up debt at an auction. The firepower is apparently coming from the European Central Bank's first-ever three-year funding tender on Wednesday. Investors hope banks will use the cheap funding to buy debt of fiscally troubled EU nations.

Investors have been focused on how the large southern European economies will refinance debt next year if financing costs remain excessively high. Any sign yields may be easing is seen as a positive for markets.

The S&P 500 has gained an average of 1.6 percent in the last five days of the year and the first two days in January since 1969, according to the Stock Traders Almanac.

The phenomenon is called the Santa Claus rally. Occasions when the market does not rally during those dates often precede a bear market, the Almanac says.

About 86 percent of stocks traded on the New York Stock Exchange closed in positive territory while four-fifths of Nasdaq-listed shares closed higher.

(Reporting by Ryan Vlastelica; Editing by Kenneth Barry)