By Kristina Cooke NEW YORK, Oct 20 (Reuters) -U.S. stocks rallied on Monday after the Federal Reserve's chairman backed more government spending to help the economy and credit market conditions showed further signs of improvement. But the advance of over 4 percent in both the Dow and S&P came on the thinnest daily volume in nearly a month, signaling investors remain skittish about diving back into stocks after weeks of punishing volatility. With stocks at five-year lows, thawing credit markets did inspire some bargain hunters to buy some of the biggest victims of the recent sell-off. Shares of energy, utilities and materials companies led the way higher. Shares of oil field services companies Halliburton Co (HAL.N: Quote, Profile, Research, Stock Buzz) and Weatherford International Ltd (WFT.N: Quote, Profile, Research, Stock Buzz) jumped after they posted better-than-expected quarterly earnings. The energy sector also got a boost as the price of oil rose and analysts at Oppenheimer & Co raised recommendations on energy stocks such as Chevron (CVX.N: Quote, Profile, Research, Stock Buzz) and Exxon Mobil (XOM.N: Quote, Profile, Research, Stock Buzz). [ID:nWNAB8457]. Both Chevron and Exxon climbed more than 10 percent. "We've seen some improvement in some credit metrics and Bernanke talking about a potential economic stimulus is beneficial," said Bucky Hellwig, senior vice president at Morgan Asset Management in Birmingham, Alabama. "Energy stocks are also helping the market's advance here." The Dow Jones industrial average .DJI jumped 413.21 points, or 4.67 percent, to 9,265.43, while the Standard & Poor's 500 Index .SPX climbed 44.85 points, or 4.77 percent, to 985.40. The Nasdaq Composite Index .IXIC shot up 58.74 points, or 3.43 percent, at 1,770.03. Trading volume on the New York Stock Exchange was the lowest since Sept. 26. On the NYSE, about 1.23 billion shares changing hands, far below last year's estimated daily average of roughly 1.90 billion, while on Nasdaq, about 2.06 billion shares traded, also below last year's daily average of 2.17 billion. A sharp drop in the rates banks charge each other for loans raised hopes that global efforts to shore up the banking system were taking hold. A lack of confidence had spurred financial institutions to hoard cash for weeks after the jarring collapse of Lehman Brothers. For details, see [ID:nLK256928]. A sub-index of financial shares rose 2.8 percent, lagging the broader market's rally, on lingering concerns about how quickly the financial system will recover from the crisis. Federal Reserve Chairman Ben Bernanke's comments on the need for a second economic stimulus plan added to the positive tone. [ID:nWAT010367] Bernanke's remarks to Congress marked the first time that the Fed chairman explicitly endorsed a second stimulus package. The government sent out about $100 billion in tax-rebate checks over the summer to try to jumpstart the economy, but consumer spending has been sluggish since then. Among energy stocks, Chevron's stock rose 11.6 percent to $69.61, while Exxon's shares rose 10.2 percent to $74.99 on the New York Stock Exchange. The S&P energy index gained 11.2 percent. Shares of Halliburton Co (HAL.N: Quote, Profile, Research, Stock Buzz) climbed 13.9 percent to $20.80, while Schlumberger (SLB.N: Quote, Profile, Research, Stock Buzz) gained 11.5 percent to $55.74. The price of oil rose on expectations that OPEC may cut output this week to raise prices. U.S. front-month crude CLc1 rose $2.40 to settle at $74.25 a barrel. Last week, energy shares were among the worst hit on worries that a slowing economy would continue to curb demand for energy. In deal news, Exelon Corp (EXC.N: Quote, Profile, Research, Stock Buzz), the largest U.S. nuclear power operator, made an unsolicited offer over the weekend to acquire NRG Energy Inc (NRG.N: Quote, Profile, Research, Stock Buzz) for $6.2 billion in stock. [ID:nN19460518]. NRG surged 29.3 percent to $25, while Exelon edged up 0.2 percent to $54.59. On Nasdaq, biotechnology shares, often seen as better able to withstand an economic downturn, rose. Their gains offset a drop in shares of big-cap technology companies. Gilead Sciences (GILD.O: Quote, Profile, Research, Stock Buzz), up 8 percent at $46.49, contributed the most to the Nasdaq 100's gain. Advancing stocks outnumbered declining ones by a ratio of more than 5 to 1 on the NYSE and by 3 to 1 on Nasdaq. (Editing by Jan Paschal)

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