Stocks soared more than 2 percent in a broad rally on Monday as a merger between two big Greek banks provided a rare bit of encouraging news out of debt-stricken Europe.

A rebound in consumer spending calmed fears of a new U.S. recession and also helped lift all 10 S&P sectors. Only five S&P stocks ended in negative territory while the CBOE Volatility index <.VIX>, a measure of investor fear, lost 9.3 percent. But volume was low, amplifying the surge in shares.

Financial stocks were the top gainers after Greek banks Alpha and EFG Eurobank sealed a merger with help from Qatar, shoring up a sector battered by the euro zone's debt crisis.

Insurers also rose sharply as property damage from Hurricane Irene was less than feared, according to early estimates.

The Greek deal consolidates the number of weak banks in the region and reduces the risk from one potential flashpoint that could reignite the smoldering euro zone debt crisis, which has been hanging over the global financial system. In addition, the foreign investment is a sign that investors view the region as undervalued.

Many have come to see Greece as a lost cause, so to have a merger potentially making a strong (bank) in Greece indicates that it isn't as dire a situation as might otherwise have been assumed, said Bruce McCain, chief investment strategist at Key Private Bank in Cleveland, Ohio.

With public transport still struggling to return to service in New York on Monday after the area's brush with Hurricane Irene, many Wall Street firms were understaffed, contributing to the lightest volume in a month. About 6.5 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.

The bears stayed home in what remains a wait-and-see market, but the light volume exacerbated the day's move, said Dick Del Bello, senior partner at Conifer Group, a hedge fund service provider in New York. That vacuum of light volume is allowing us to rise nicely.

Among insurers, Dow component Travelers Cos Inc gained 5/1 percent to $50.75, while Allstate Corp jumped 8.5 percent to $26.30 and Progressive Corp

rose 3.6 percent to $18.89. The iShares Dow Jones U.S. Insurance Index Fund rose 5.3 percent.

The Dow Jones industrial average <.DJI> was up 254.71 points, or 2.26 percent, at 11,539.25. The Standard & Poor's 500 Index <.SPX> was up 33.28 points, or 2.83 percent, at 1,210.08. The Nasdaq Composite Index <.IXIC> was up 82.26 points, or 3.32 percent, at 2,562.11.

Consumer spending recorded its largest increase in five months in July, supporting views the economy was not falling back into recession. And while the number of signed contracts for home sales fell 1.3 percent in July, the decline matched forecasts and managed to top year-ago levels.

Consumer spending has been in focus in the past couple of months, so any kind of strength there is a good thing for the economy and the market, said Brian Lazorishak, portfolio manager at Chase Investment Counsel in Charlottesville, Virginia.

Traders were also relieved that hurricane damage in New York City, especially in lower Manhattan, was not nearly as bad as had been feared.

The S&P financial index <.GSPF> was up 4.2 percent and the KBW Banks index <.BKX> added 4.5 percent. Bank of America Corp rose 8.1 percent to $8.39 and JPMorgan Chase & Co gained 3.9 percent to $37.64.

U.S.-listed shares of National Bank of Greece soared 38 percent to $1.15, while European shares ended up 1.3 percent.

LDK Solar Co LTD rose 5.8 percent to $6.18 after it forecast third-quarter revenue above expectations.

About 90 percent of issues traded on the New York Stock Exchange ended in positive territory, while on the Nasdaq, 85 percent of stocks ended higher.

(Editing by Leslie Adler)