(Reuters) - Stocks rallied more than two 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, while a rebound in consumer spending calmed fears of a new recession.

Financial stocks were the top gainers after Greek banks Alpha (ACBr.AT) and EFG Eurobank (EFGr.AT) sealed a merger that was expected to trigger more deals to shore up a sector battered by the euro zone's severe debt crisis and recession.

The banks "need to strengthen their balance sheets, and this would help with that, making the sector less worrisome," said David Ruff, portfolio manager at the Forward Select EM Dividend Fund in San Francisco. "We'll probably need to see greater policy action in the region, but the merger needs to be done and that's why we're seeing a pause in the recent selling pressure."

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

Travelers Cos Inc (TRV.N) rose 4.7 percent to $50.59, while Allstate Corp (ALL.N) jumped 7.3 percent to $26.02.

All 10 S&P sectors gained more than 1 percent, and only five stocks in the S&P 500 were in negative territory.

The Dow Jones industrial average .DJI was up 219.89 points, or 1.95 percent, at 11,504.43. The Standard & Poor's 500 Index .SPX was up 28.25 points, or 2.40 percent, at 1,205.05. The Nasdaq Composite Index .IXIC was up 70.33 points, or 2.84 percent, at 2,550.18.

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

"Consumer spending has been focused on 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.

Wall Street was also relieved that hurricane damage in New York City, especially in lower Manhattan, was not as bad as had been feared. The New York Stock Exchange and the Nasdaqopened on schedule, but trading volume was light as many workers were stuck at home with many commuter rail and bus lines not operating.

The S&P financial index .GSPF was up 3.4 percent and the KBW Banks index .BKX added 3.6 percent. Bank of America Corp (BAC.N) rose 5.5 percent to $8.19 and JPMorgan Chase & Co (JPM.N) gained 3.1 percent to $37.32.

U.S.-listed shares of National Bank of Greece (NBG.N) soared 36 percent to $1.14, while European shares ended up 1.3 percent. .EU

LDK Solar Co LTD (LDK.N) rose 2.2 percent to $5.97 after it forecast third-quarter revenue that beat expectations.

(Editing by Leslie Adler)

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