Aug. 22 (Bloomberg) -- U.S. stocks advanced, led by banks and retailers, on oil's biggest plunge in four years and speculation a purchase of Lehman Brothers Holdings Inc. would end the worst slump by financial shares since at least 1962.

Lehman, which tumbled almost 80 percent this year, rallied 13 percent after Korea Development Bank said it's considering an investment in the brokerage. Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co. gained more than 3.8 percent, helped by Federal Reserve Chairman Ben S. Bernanke's forecast that inflation will ease. United Airlines parent UAL Corp. rose 12 percent as crude lost 5.4 percent, the most since 2004.

The Standard & Poor's 500 Index added 14.48 points, or 1.1 percent, to 1,292.20, reducing its first weekly drop since July to 0.5 percent. The Dow Jones Industrial Average advanced 197.85, or 1.7 percent, to 11,628.06. Only 888 million shares changed hands on the New York Stock Exchange, the fewest for a full trading session since Dec. 26. Volume this week was 35 percent less than the year-to-date average.

``The U.S. financial system is not going down the tubes,'' James Gaul, a money manager at Boston Advisors LLC in Boston, which oversees about $2 billion, told Bloomberg Radio. The Lehman development ``assuages investor fears.''

The 54 percent plunge in the S&P 500 Financials Index from its February 2007 record through July 15 of this year was the steepest retreat in at least 46 years, according to data compiled by Birinyi Associates Inc., the Westport, Connecticut-based research and money management firm founded by Laszlo Birinyi.

Bear Stearns Collapse

Financial companies in the S&P 500 dropped 31 percent this year before today after the market for subprime home loans collapsed. Bear Stearns Cos., once the largest underwriter of mortgage bonds after Lehman, was rescued by JPMorgan Chase & Co. in a March takeover brokered by the Federal Reserve.

Lehman added 69 cents to $14.41 after surging as much as 16 percent. Korea Development Bank is considering investments including Lehman, a KDB spokesman said without elaborating. Chief Executive Officer Min Euoo Sung and Lehman spokesman Mark Lane declined to comment.

``Lehman Brothers was the next firm likely to fail,'' said Jeffrey Kleintop, who helps oversee $273 billion as chief market strategist at LPL Financial in Boston. ``The market looks at this as a positive in that there have been expectations Lehman would survive in some form. The question was where was the money going to come from.''

Citigroup added 67 cents to $18.14, Bank of America rose $1.17 to $30.21 and JPMorgan increased $1.41 to $37.67. The S&P 500 Financials Index jumped 3.1 percent, the most since Aug. 8.

Bernanke on Inflation

Banks extended their gain after Bernanke said inflation should ease later this year and in 2009 thanks to a recovery in the dollar and declines in commodity prices. The Fed is ``committed to achieving medium-term price stability,'' Bernanke said in a speech in Jackson Hole, Wyoming.

Freddie Mac dropped the most in the S&P 500, while Fannie Mae swung between gains and losses. Their $36 billion in preferred stock was downgraded to the lowest investment-grade rating by Moody's Investors Service, which said the increased likelihood of ``direct support'' from the U.S. Treasury may devalue the securities. Billionaire investor Warren Buffett told CNBC that the firms ``don't have any net worth.''

Fannie Mae added 15 cents to $5. Freddie Mac lost 35 cents, or 11 percent, to $2.81. Both are trading near the lowest prices in two decades.

Stocks fell this week on growing concern shareholder value will be wiped out at the two largest mortgage-finance companies if they are bailed out by the government and commodities surged before today. The S&P 500 has dropped 17 percent from an October record as credit losses at banks topped $500 billion globally and record oil curbed growth.

Airlines, GM Rise

UAL added $1.39 to $12.72 today, US Airways Group Inc. increased $1.06 to $7.86 and Continental Airlines Inc. climbed $1.52 to $15.86. General Motors Corp., the largest U.S. automaker, gained 52 cents to $10.44.

Oil fell as the U.S. dollar strengthened and BP Plc restored shipments on a Caspian Sea pipeline through Turkey. Crude tumbled $6.59 a barrel to $114.59 in New York.

Gap Inc. climbed to the highest price since April, rising 87 cents to $19.88. The largest U.S. clothing retailer said second- quarter profit rose 51 percent, beating estimates, after it discounted fewer jeans and T-shirts.

JPMorgan Chase & Co. strategists said investors should buy more financial stocks and U.S. companies that rely on discretionary spending by consumers and sell energy and raw- material producers.

Dollar Boosts Profit

``Weakness in the dollar over the past year should support U.S. earnings in 2008,'' JPMorgan strategists led by Adrian Mowat wrote in a note to clients today.

The S&P 500 Consumer Discretionary Index rose 2.2 percent, the most among 10 S&P 500 industries after financials. Department-store operator Dillard's Inc. had the biggest gain, rising 77 cents, or 7 percent, to $11.85.

Crude's retreat drove S&P 500 energy stocks to a 1.6 percent decline. Oil producers Exxon Mobil Corp. and Chevron Corp. were the only decliners in the 30-company Dow average. Exxon slipped 5 cents to $80.30, and Chevron lost 42 cents to $88.10.

Cabot Oil & Gas Corp. had the second-steepest drop in the S&P 500, losing $2.77, or 6.1 percent, to $42.66. The natural-gas producer was cut to ``neutral'' from ``buy'' at Merrill Lynch & Co. by analysts who reduced their 2008 earnings estimate on a lower price forecast for the fuel.

Raw-materials producers were the only other industry among 10 to slump, losing 0.4 percent. Copper declined 2.2 percent in New York, the most since Aug. 8. Gold and silver also fell.

Freeport-McMoRan Copper & Gold Inc., the world's largest publicly traded copper producer, declined $3.06 to $90.60. Newmont Mining Corp., the largest U.S. gold producer, lost 60 cents to $44.29.

To contact the reporter on this story: Eric Martin in New York at emartin21@bloomberg.net.

Last Updated: August 22, 2008 16:36 EDT