By Chuck Mikolajczak
NEW YORK (Reuters) - Bond prices rallied and European bank stocks rose on Monday after Portugal forged a plan to prevent the collapse of one of its biggest lenders.
U.S. stocks also notched their biggest gain since July 18, with the S&P 500 <.SPX> coming off its worst week since 2012, as concerns over higher U.S. interest rates eased following Friday's U.S. employment report.
"Probably the biggest thing of all is it looks like they have come together with a plan on Banco Espirito Santo in Portugal, that in the background was maybe one thing that was spooking people quite a bit," said Peter Jankovskis, co-chief investment officer at OakBrook Investments LLC in Lisle, Illinois.
"That’s where the biggest development has been, they have a plan in place and they are moving forward on that, that is one thing that had contributed to the downdraft."
Portugal on Sunday announced a nearly 5-billion-euro ($6.6 billion) rescue of the country's largest listed bank, Banco Espirito Santo , preventing it from collapsing and potentially destabilizing the regional banking sector.
Portugal's 10-year yield fell to 3.651 percent, down 7 basis points, as investors bought the bonds on relief after the package was announced. Other European bond markets also rallied, with yields on Spanish and Italian bonds moving lower .
The FTSEurofirst 300 <.FTEU3> index of leading shares closed down 0.19 percent, giving up early gains. Pan-European banking stocks <.SX7P> finished up 0.3 percent, however.
The MSCI All-World Index <.MIWD00000PUS> advanced 0.3 percent.
U.S. financial shares rose <.SPSY> 0.8 percent, buoyed by a 3.1 percent gain in Berkshire Hathaway after it said on Friday second-quarter profit soared 41 percent.
The Dow Jones industrial average <.DJI> rose 75.91 points or 0.46 percent, to 16,569.28, the S&P 500 <.SPX> gained 13.84 points or 0.72 percent, to 1,938.99 and the Nasdaq Composite <.IXIC> added 31.25 points or 0.72 percent, to 4,383.89.
FED FEARS EASE
The rate-sensitive U.S. two-year Treasury note yield inched down at 0.4723 percent and the 10-year yield fell to 2.49 percent , declining in tandem with European yields.
Bond yields were also capped by Friday's U.S. jobs data for July, which showed job growth lower than forecast, the unemployment rate higher than expected and almost no growth in average hourly earnings.
A Reuters poll on Friday after the jobs data showed that a majority of top Wall Street bond firms do not see a rise in U.S. interest rates before the second half of next year.
"The real question becomes, will the Fed be able to transition and exit from QE3 gracefully?" said Adam Sarhan, chief executive of Sarhan Capital in New York.
Major currencies were little changed. The euro was at $1.3420 , off last week's eight-month low of $1.3365, while the dollar stood at 102.56 yen , off Wednesday's four-month peak of 103.08.
U.S. crude oil futures settled up 41 cents at $98.29 per barrel , recovering from a six-month low of $97.09 on Friday, and Brent crude settled up 57 cents at $105.41. Spot gold edged down 0.4 percent at $1,287.75 an ounce .
(Additional reporting by Akane Otani; Editing by Dan Grebler and James Dalgleish)