US STOCKS-Wall St rallies on 'fiscal cliff' optimism

* Fiscal cliff negotiations move ahead, lifting banks,

energy

* Top Republican says vote in Congress could come this week

* Gun makers' shares fall after Newtown, CT, shooting

* Dow up 0.8 pct, S&P 500 up 1 pct, Nasdaq up 1.3 pct

NEW YORK, Dec 18 (Reuters) - U.S. stocks climbed on Tuesday,

putting the S&P 500 on track for its best two-day run in a

month, as investors gained confidence that "fiscal cliff" talks

were progressing, even as significant differences separate

Democrats and Republicans in Washington.

The gains followed a rally on Monday that lifted the S&P 500

to its highest point in nearly two months. Investors remain

confident that Washington will come to an agreement to avoid a

series of spending cuts and tax hikes before the end of the year

that could hurt economic growth.

President Barack Obama's most recent offer makes concessions

to the Republicans in taxes and entitlement spending, but House

Speaker John Boehner said the offer is "not there yet," though

he remains hopeful about an agreement. Senate Democrats,

however, have expressed concern about entitlement cuts,

particularly to Social Security.

"As you get more and more clarity and dialogue that there

will be a compromise to avoid a fiscal cliff, I think the

markets are going to rally," said Weston Boone, vice president

of listed trading at Stifel Nicolaus Capital Markets, in

Baltimore.

"What's holding this market back - the S&P 500 - from

continuing to reach higher highs is the macro headwinds, and a

lot of that emanates from (Washington) D.C."

For a second day, banks led the rally. Goldman Sachs Group

shares shot up 3.1 percent to $127.30 and Morgan Stanley

gained 3.2 percent to $19.13 after Jefferies Group

reported a higher-than-expected adjusted quarterly

profit.

Jefferies rose 2.9 percent to $18.77. The S&P 500 Financial

Index climbed 1.2 percent.

"I think it's an expectation that if the fiscal cliff is

resolved, it's going to be a better environment in 2013 for the

financial names," said Michael James, senior trader at Wedbush

Morgan in Los Angeles.

Shares of firearm makers sank on Tuesday as investors sold

after the school shooting in Newtown, CT on Friday that killed

20 children and six adults.

Smith and Wesson fell 9.8 percent to $7.81, as the

stock stayed on track for its busiest day in history. Sturm

Ruger and Co slid 8.3 percent to $40.35.

The Dow Jones industrial average jumped 104.46

points, or 0.79 percent, to 13,339.85. The Standard & Poor's 500

Index rose 13.77 points, or 0.96 percent, to 1,444.13.

The Nasdaq Composite Index gained 39.29 points, or 1.31

percent, to 3,049.89.

Tech shares rose, and gains in large-cap technology shares

lifted the Nasdaq. Seagate Tech rose 4.9 percent to

$29.41 while F5 Networks Inc gained 4.7 percent to

$96.93. The S&P Information Technology Index rose 1.5

percent.

The S&P Energy Index also climbed 1.5 percent.

Baker Hughes Inc said third-quarter margins and

revenue would be below its expectations because of lower land

drilling activity and price erosion. Shares rose 4.3 percent to

$42.3417, reversing a decline in the premarket session.

Arbitron Inc surged 23.6 percent to $47 after

Nielsen Holdings NV agreed to buy the media and

marketing research firm in a deal worth $1.26 billion. Nielsen

rose 3.5 percent to $30.66.

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