Early rally fades after Bernanke's comments

NEW YORK (Reuters) - Stocks rose on Thursday after China's central bank cut lending and deposit rates, but retreated from session highs as comments from Federal Reserve Chairman Ben Bernanke dimmed hopes for further stimulus measures from the central bank.

The surprising move by China's central bank to lower benchmark interest rates by 25 basis points in an effort to rejuvenate economic growth came after comments by Federal Reserve officials increased investors' expectations for more Fed support.

In comments on Wednesday, Atlanta Fed President Dennis Lockhart and Federal Reserve Vice Chair Janet Yellen led investors to become optimistic about the possibility of more easing ahead, due in part to the effects of the euro-zone debt crisis.

But early enthusiasm faded as Bernanke told a congressional committee that the central bank was ready to take action if financial troubles increase, citing difficulties in Europe, but gave no hint of an imminent stimulus plan.

"I don't think the investment community thinks they are immune to Europe so it's not like it's a big revelation, but needless to say (Bernanke) is what the market is reacting to," said Jason Weisberg, managing director at Seaport Securities Corp in New York.

"Regardless of what programs are put into place to try to stem the damage, the overall feeling is they need to do better and somehow they have to figure it out, and they can't do it with a Band-aid. They have to do it properly."

The rate cut in China, the world's No. 2 economy, helped lift the stocks of U.S. companies linked to China's commodity-hungry industrial complex. U.S. Steel Corp climbed 1.4 percent to $20.31, and miner Freeport-McMoRan Copper & Gold Inc advanced 0.6 percent to $33.86. The S&P Materials index <.GSPM>, up 0.8 percent, led all major S&P sectors.

The Dow Jones industrial average <.DJI> gained 91.99 points, or 0.74 percent, to 12,506.78. The Standard & Poor's 500 Index <.SPX> rose 6.54 points, or 0.50 percent, to 1,321.67. The Nasdaq Composite Index <.IXIC> added 5.91 points, or 0.21 percent, to 2,850.63.

Germany's government and main opposition agreed on the outlines of a proposal for a European financial transaction tax, which could pave the way for parliament to approve a fiscal pact and permanent rescue plan for the euro zone.

Spain managed to raise more than 2 billion euros at a bond auction, tempering fears it is being cut off from financial markets, although it had to pay a heavy price to borrow the funds.

Equities showed little reaction to a downgrade by Fitch in Spain's credit rating to 'BBB' with a negative outlook, just two notches away from junk status.

Stocks jumped more than 2 percent in the previous session, coming on the heels of a drop of more than 6 percent in May. The index appeared to successfully bounce off its 200-day moving average, a key technical support level, putting it on track for its biggest weekly percentage gain of the year.

Shares of Navistar International Corp plunged 15 percent to $23.92 after it posted a second-quarter loss, due to a big charge for warranty costs to repair engines built in 2010 and 2011. The truck maker also cut its full-year earnings outlook.

Health insurer Molina Healthcare Inc recalled its 2012 earnings guidance, citing uncertainties regarding medical costs in Texas, pushing its stock down 29.1 percent to $18.27.

(Reporting By Chuck Mikolajczak; Editing by Jan Paschal)

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