US STOCKS-Market gains as Fannie reassures investors

(Updates to midday, changes byline)

By Cal Mankowski

NEW YORK, May 6 (Reuters) - U.S. stocks edged higher on Tuesday after speculation that Microsoft and Yahoo will resume merger talks and comments from housing finance company Fannie Mae reassured investors about its financial condition.

Before the opening bell, Fannie Mae (FNM.N: Quote, Profile, Research), the largest provider of U.S. home financing, reported a net $2.5 billion loss and said it sees significant credit losses into 2009. The company also cut its dividend.

Shares of Fannie Mae and its smaller rival, Freddie Mac, opened sharply lower but changed course and posted strong gains after Fannie's positive comments on a conference call.

Microsoft Corp MSFT.0 and Yahoo Inc (YHOO.O: Quote, Profile, Research) both rose as speculation continued that pressure from Yahoo's shareholders would bring about renewed merger talks and an eventual deal. Microsoft shares gained 1.4 percent to $29.50 while Yahoo jumped nearly 6 percent to $25.81, making them among the Nasdaq's top positive movers.

"It seems like the shareholders are going to try to make something happen, but the stock is acting like that's real," said Bobby Harrington, head of block trading at UBS in Stamford, Connecticut.

The Dow Jones industrial average .DJI rose 1.71 points, or 0.01 percent, at 12,971.25. The Standard & Poor's 500 Index .SPX gained 4.58 points, or 0.33 percent, to 1,412.07. The Nasdaq Composite Index .IXIC climbed 9.71 points, or 0.39 percent, to 2,473.83.

Fannie Mae shares climbed 6.2 percent to $30.04 and Freddie Mac shares advanced 5.2 percent to $26.85. Moody's Investors Service affirmed Fannie's "Aaa" senior debt rating.