U.S. stocks chalked up their best day in nearly two months on Thursday as investors welcomed a string of robust earnings reports, while Greece appeared close to a bailout deal, easing fears about a wider sovereign debt crisis.

News that Greece was readying severe austerity measures to secure a multibillion-euro aid package spurred widespread relief, and the more beaten-down sectors, like banks, recouped recent losses for a second day running.

Continuing the generally favorable earnings season, cellphone maker Motorola Inc beat forecasts and its stock gained 3.5 percent to $7.16. Visa Inc, reported higher-than-expected profits and raised its revenue outlook, spurring hopes of a revival in consumer spending.

There is a continuation of this tug of war between the negative bias put into the market by sovereign debt worries out of Europe, said Craig Peckham, equity trading strategist at Jefferies & Company in New York. Right now, the U.S. corporate fundamental story is winning the battle.

The S&P 500's percentage gain marked its largest daily advance in nearly two months.

After spiking sharply this week, the CBOE VIX <.VIX> volatility index, Wall Street's index of choice for gauging market volatility, fell 12.5 percent -- its steepest drop in 14 months.

The Dow Jones industrial average <.DJI> gained 122.05 points, or 1.10 percent, to 11,167.32. The Standard & Poor's 500 Index <.SPX> rose 15.42 points, or 1.29 percent, to 1,206.78. The Nasdaq Composite Index <.IXIC> added 40.19 points, or 1.63 percent, to 2,511.92.

The Dow and the S&P 500 posted their biggest one-day gains since March 5 while the Nasdaq rose the most since January 4.

Bank of America rose 2.9 percent to $18.30, while the KBW bank index <.BKX> rose 2.4 percent.

Visa's stock slid 0.8 percent to $92.82 after hitting an all-time high at $97.14 on Monday.

In a sign the mood was still cautious, the Dow and the S&P 500 came off session highs after ratings agency Moody's said a multi-notch credit downgrade for Greece is likely. S&P cut its debt ratings of Greece and Portugal on Tuesday, sparking a sharp sell-off in equities.

Boosting the Nasdaq, Palm Inc surged 26.1 percent to $5.84 after Hewlett-Packard Co agreed to buy the smartphone maker for $1.2 billion. HP slipped 0.8 percent to $52.88.

In the health sector, Aetna Inc reported better-than-expected quarterly profit and raised its forecast. The health insurer's stock rose 2.4 percent to $31.24, and the Morgan Stanley Healthcare Payors index <.HM0> rose 2.7 percent.

Higher oil prices during the quarter boosted profits for Exxon Mobil Corp and ConocoPhillips , though Exxon said its earnings were hurt by the health reform legislation.

Exxon's stock slid 0.8 percent to $68.66, but shares of ConocoPhillips gained 0.9 percent to $59.10.

But the energy sector's gains were limited by fallout from the sunken Deepwater Horizon rig and the oil leak that followed in the Gulf of Mexico. Shares of oilfield services companies Cameron International Corp and Halliburton Co tumbled on fears about their ties to the rig, owned by Transocean Ltd and contracted out to BP Plc .

Cameron International fell 13 percent to $38.70, Halliburton lost 5.3 percent to $31.60, while BP's New York-traded stock lost 8.3 percent to $52.56. Transocean fell 7.5 percent to $78.51 in New York.

In a sign more investors are starting to warm to equities, U.S. fund managers increased their already heavy investment in stocks in April and decreased bond allocations, a Reuters poll showed..

Initial claims for unemployment benefits fell slightly less than expected in the latest week, the government said, but the numbers were less than the previous week.

About 10.67 billion shares traded on the New York Stock Exchange, the American Stock Exchange and Nasdaq, above last year's estimated daily average of 9.65 billion.

Advancing stocks outnumbered declining ones on the NYSE by a ratio of 3 to 1, while on the Nasdaq, nearly three stocks rose for every one that fell.

(Editing by Jan Paschal)

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