gopalakrishna

* U.S. stocks extends gains, Europe rebounds on oil slide

* Oil slips $6 a barrel on rise in U.S. crude inventories

* Dollar rises as Bernanke discusses currency intervention (Adds European stock close, fresh prices)

By Herbert Lash

NEW YORK, July 16 (Reuters) - U.S. and European stocks rose on Wednesday after oil prices fell sharply on news of an unexpected leap in U.S. crude supplies last week and a big U.S. bank posted surprisingly strong results, easing investor fears about the battered financial sector.

Spot gold prices tumbled about 2 percent as crude oil slid and the dollar extended gains after Federal Reserve Chairman Ben Bernanke said that under certain conditions currency intervention may be warranted.

Shares in the beaten-down financial sector surged. The S&P financial index rose 6.3 percent, while the KBW Banks index .BKX surged 9.4 percent.

Not all the news was positive. Data showed U.S. consumer price inflation accelerated to an annual rate of 5 percent in June -- well above economists' forecasts -- and U.S. government debt prices fell sharply.

U.S. crude oil futures fell more than 4 percent after a U.S. government agency reported a surprise uptick in import levels, causing crude prices to chalk up the biggest two-day loss in percentage terms since January 2007.
While the two-day drop in the price of oil of almost $15 only brought crude to a three-week low, the fall was enough to help Wall Street rally more than 1 percent. Equity markets had slipped entirely into a bear market earlier this week.

An index of top European shares also closed higher, a day after hitting a three-year closing low.

Stronger-than-expected quarterly results by Wells Fargo (WFC.N: Quote, Profile, Research, Stock Buzz), the No. 5 U.S. bank, helped turn a sour mood on Wall Street that has seen banking shares slide to decade lows as the sector looks for still more capital after record infusions.

Wells Fargo raised its dividend 10 percent despite a 23 percent decline in profit caused by a surge in bad loans, and its shares jumped 24 percent to $25.42.

Despite the weak economy, Chief Executive John Stumpf said Wells Fargo was "one of the best positioned in financial services to growth through this adversity."

The results offered a beacon of hope for investors who have seen fear of the global credit crisis wreck havoc on the financial sector. The share price of many financial shares have lost half or more of their value this year.

Before 1 p.m., the Dow Jones industrial average .DJI rose 140.77 points, or 1.28 percent, at 11,103.31. The Standard & Poor's 500 Index .SPX added 13.09 points, or 1.08 percent, at 1,228.00. The Nasdaq Composite Index .IXIC gained 39.37 points, or 1.78 percent, at 2,255.08.

OIL DROP, BERNANKE SEND EUROPEAN SHARES HIGHER

European shares turned positive after crude fell and in response to Bernanke's comments about currency intervention.
The FTSEurofirst 300 index of top European shares closed up 0.53 percent to 1,115.97 points.

Automotive stocks soared as the dollar strengthened against the euro, with BMW (BMWG.DE: Quote, Profile, Research, Stock Buzz) rising 2 percent. Fiat (FIA.MI: Quote, Profile, Research, Stock Buzz) rose 6 percent and Peugeot (PEUP.PA: Quote, Profile, Research, Stock Buzz) added 4.6 percent.

Airline shares rose on the drop in crude. Air France-KLM (AIRF.PA: Quote, Profile, Research, Stock Buzz) rallied 7.8 percent, Lufthansa (LHAG.DE: Quote, Profile, Research, Stock Buzz) gained 4.8 percent and British Airways (BAY.L: Quote, Profile, Research, Stock Buzz) rose 6.9 percent.

The optimism might be short-lived, with some doubting the longevity of the turnaround that occurred late in the European session.

"We were oversold earlier and this is a technical rally. The comments from Bernnake were a big push but in the end nothing has really changed," said Alpha Trading asset manager Stefan de Schutter.

BANK OPTIMISM LIFTS DOLLAR

Investors had a mixed reaction to a larger-than-expected jump in U.S consumer prices for June, the largest rise since September 2005, given that it increased uncertainty about the outlook for higher interest rates even as the economy slows.

Bonds prices fell. Inflation erodes the value of fixed-income investments like government bonds over time, particularly hurting the value of long-dated bonds.

The benchmark 10-year U.S. Treasury note <US10YT=RR> fell 27/32 to yield 3.9324 percent. The 30-year U.S. Treasury bond <US30YT=RR> fell 63/32 to yield 4.59 percent.
Optimism over Wells Fargo's earnings helped lift the dollar against the euro as the bank offered investors a glimpse of stability in the hard-hit U.S. financial system.

"The dollar is likely to benefit only marginally at this point from economic data. On the other hand, if banks' earnings come on the positive side, we may see a stronger dollar," said Omer Esiner, market analyst at Ruesch International in Washington.

Further dollar gains came after Bernanke told lawmakers that currency intervention is "something that should be done only rarely, but there may be conditions in which markets are disorderly where some temporary action may be justified."

The dollar rose against major currencies, with the U.S. Dollar Index .DXY up 0.37 percent at 71.969. Against the yen, the dollar <JPY=> rose 0.08 percent at 104.71.

The euro <EUR=> fell 0.51 percent at $1.5837.

In commodities markets, oil futures fell after U.S. government data showed U.S. crude oil stocks rose 3 million barrels last week. Analysts had predicted a fall of 2.1 million barrels.

U.S. light sweet crude oil CLc1 fell $4.02 to $134.72 a barrel.

Spot gold prices <XAU=> fell $13.70 to $962.90 an ounce.

Asian stocks edged lower as investors grew more pessimistic about the outlook for global growth.
Japan's Nikkei share average .N225 ended the session barely changed, after earlier touching a 3-1/2-month low.

The Asia Pacific ex-Japan index .MSCIAPJ was largely unchanged overnight in Asia, but was trading 0.3 percent lower shortly before 1 p.m. in New York. (Reporting by Ellis Mnyandu, Richard Valdmanis, Nick Olivari, Vivianne Rodrigues, John Parry and Richard Leong in New York and Jane Merriman in London; Writing by Herbert Lash; Editing by Leslie Adler)