(Reuters) - Stocks rose on Monday, lifting the Nasdaq 100 to a 10-year high, as investors bet a 2010 rally would continue in the new year and factory and housing data pointed to a strengthening recovery.

The Institute of Supply Management's manufacturing survey grew for a 17th straight month in December, adding to recent evidence the recovery was picking up steam, while the Commerce Department said construction spending increased to its highest level since June.

"We are starting the year off on the right note here. Everybody's back and suddenly everybody realizes that the economy is pretty good," said Stephen Massocca, managing director at Wedbush Morgan in San Francisco.

"There is a lot of money in cash, a lot of money in bonds that would like out of bonds, and it's only natural with the economic improvement it's finding its way to equities."

The Dow Jones industrial average .DJI gained 108.79 points, or 0.94 percent, to 11,686.30. The Standard & Poor's 500 Index .SPX gained 15.44 points, or 1.23 percent, to 1,273.08. The Nasdaq Composite Index.IXIC jumped 46.63 points, or 1.76 percent, to 2,699.50.

The Nasdaq 100 .NDX hit an intraday high of 2264.71, it's highest level since February 2001.

Marc Pado, U.S. market strategist at Cantor Fitzgerald & Co in San Francisco. also pointed to the "January effect" boosting stocks as fund managers are no longer engaged in window dressing and focusing on stocks they find attractive versus names that have done well for the year.

"You get to the first day of the new quarter, new year. It's an opportunity to invest in some names that you won't have to show investors your for awhile."

Adding to the optimistic economic picture, the official Chinese purchasing managers' index edged down in December and fell short of forecasts, easing concerns that rising inflation would lead the government to take more steps to control growth.

U.S. stocks ended the year with double-digit gains, with the S&P 500 .SPX recording its best December since 1991. The gains marked a recovery to levels before the collapse of Lehman Brothers in September 2008. For the year, the S&P rose 12.8 percent, the Dow Jones industrial average .DJI climbed 11 percent, and the Nasdaq .IXIC surged 16.9 percent.

From its July low the S&P has risen 23 percent, boosted by improving economic data, positiveearnings reports and stimulus measures by the U.S. Federal Reserve. Investors returning from the holidays will closely watch a host of economic data this week for signs of improvement in the economy to justify the gains.

Bank of America Corp (BAC.N) will put aside $3 billion in the fourth quarter related to poorly underwritten mortgages it sold to Fannie Mae and Freddie Mac after the bank agreed to settle claims over the repurchase of those loans. Bank of America shares were up 4.6 percent to $13.96.

Alcoa Inc (AA.N) gained 4.5 percent to $16.08 after Deutsche Bank upgraded the stock to "buy" from "hold," citing "growing optimism on both aluminum's likelihood of higher prices and a belief that Alcoa has turned the corner from an operational point of view."

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