Wall Street rallied for a second day on Thursday as concerns about Europe's sovereign debt crisis waned, forcing investors to reverse bearish bets on the market.

Buyers piled into the market as they worked to negate bets the S&P 500 will fall. Net short positions in the E-Mini S&P 500 index futures contract hit a two-year high last week. But since then, expectations for a resolution to Europe's debt crisis have curbed some of the pessimism.

Several times this year, we've had sovereign debt fears crop up, said Michael James, a senior trader at regional investment bank Wedbush Morgan in Los Angeles. As more traders get increasingly convinced this is going to be the time it really matters, and short positions build up more, you have further explosive moves higher as those shorts are forced to cover.

Commodity Futures Trading Commission data showed net short positions in the E-mini S&P futures rose to more than 210,000 contracts, the biggest short position since the week of July 22, 2008.

Traders said the ECB had been purchasing Portuguese and Irish bonds, which supported the market even as the central bank said it would not accelerate the program.

Meanwhile, much stronger-than-expected November same-store sales from U.S. retailers, a sharp jump in pending home sales, and better labor market data were the latest signs that the U.S. economic recovery is on track and a double-dip recession less likely.

Bank stocks led the way. The KBW bank index <.BKX> shot up 3.9 percent. The S&P 500 financial index <.GSPF> rose 2.6 percent, making it the largest gainer among S&P sectors.

The fears had been centered on Europe. That seems to have stabilized, and now the focus is on what domestic and international growth will look like. People are betting that growth will be better than people had feared, said Mark Bronzo, portfolio manager at Rydex-SGI in Irvington, New York.

The Dow Jones industrial average <.DJI> gained 106.63 points, or 0.95 percent, to 11,362.41. The Standard & Poor's 500 Index <.SPX> rose 15.46 points, or 1.28 percent, to 1,221.53. The Nasdaq Composite Index <.IXIC> added 29.92 points, or 1.17 percent, to 2,579.35.

RETAILERS AND BANKS CLIMB

Retailers' shares rose on the stronger-than-expected November sales data, which reflects a healthy start to the holiday shopping season. The S&P 500 retail index <.RLX> added 1.8 percent. JC Penney rose 2.3 percent to $34.47.

The data follows a recent flurry of reports suggesting a pick-up in U.S. economic activity that has let investors worry less about troubles overseas.

Further supporting financial shares, Goldman Sachs Group Inc said U.S. banks are on stronger footing because of an improving economy, higher equity prices and a favorable interest-rate environment.

Shares of regional lender Marshall & Ilsley Corp jumped 12.3 percent to $5.48 and Bank of America Corp gained 3.5 percent to $11.68.

Home builders' stocks rose as the National Association of Realtors index of pending home sales unexpectedly climbed in October, hinting the economic recovery had started to stabilize. The Dow Jones U.S. Home Construction index <.DJUSHB> advanced 3.7 percent.

BRIGHTER ECONOMIC PICTURE

Bob Doll, chief equity strategist at BlackRock, an investment management company, said an easing of fears about Europe meant investors could focus on the strengthening economic picture, which was showing a continuation of this modest and noticeable improvement.

Contrast it with the summer months when a double-dip was in everybody's vocabulary, and lo and behold, things start getting a little bit better, he said.

Ahead of Friday's closely watched jobs report, data showed the four-week moving average for initial weekly claims for jobless benefits fell to a fresh two-year low, though new requests rose for the week.

PepsiCo Inc

agreed to buy Russian juice and dairy producer Wimm-Bill-Dann . U.S.-traded shares of Wimm-Bill-Dann surged 27.9 percent to $31.34.

The Dow and the S&P 500 scored their biggest one-day percentage gains in three months on Wednesday as optimism about efforts to resolve the European Union's debt crisis helped push the S&P above 1,200.

If the S&P 500 continues to hold above 1,200, the market will see strong resistance at 1,225-1,230, which coincides with a recent two-year high and the 61.8 percent Fibonacci retracement of the benchmark's slide from October 2007 to March 2009, a key technical indicator.

About 8.58 billion shares traded on the New York Stock Exchange, the American Stock Exchange, and the Nasdaq, compared with an average of 8.48 billion so far this year.

(Reporting by Edward Krudy; Editing by Jan Paschal)