US STOCKS-Stocks jump on hope housing market will stabilize

(Updates to mid-afternoon, changes byline)

By Justin Grant

NEW YORK, March 20 (Reuters) - U.S. stocks rose on Thursday as falling gold and oil prices calmed inflation fears, while major mortgage financiers Fannie Mae and Freddie Mac surged for a third day on hopes they will stabilize the housing market.

Fears about rising inflation cooled as commodity prices fell across the board. Metal and oil investors retreated into cash, taking profits after a series of record peaks this year.

Prior to this week, investors had piled into gold, which emerged as a safe-haven after U.S. stocks slumped due to recession fears and the global credit crisis, sending the price of the metal briefly above $1,000 an ounce for the first time.

The Dow Jones industrial average .DJI climbed 166.97 points, or 1.38 percent, at 12,266.63. The Standard & Poor's 500 Index .SPX gained 17.79 points, or 1.37 percent, to 1,316.21. The Nasdaq Composite Index .IXIC was up 26.76 points, or 1.21 percent, at 2,236.72.

Fannie Mae (FNM.N: Quote, Profile, Research) and Freddie Mac (FRE.N: Quote, Profile, Research) soared after Keefe, Bruyette & Woods upgraded them, saying a decision by federal regulators to immediately reduce the amount of excess capital they need to hold should let the government-sponsored enterprises support liquidity in the mortgage market.

"Value investors are starting to see the Fed ... has successfully made the statement that whatever disaster might pop up, they're stepping in to liquefy the situation," said Michael Williams, chief investment strategist at Tocqueville Asset Management in New York. "This inflation-hawk kind of talk has been way overdone. The little guy panicked out of stocks."

On Tuesday, the S&P 500 made its biggest one-day jump in more than five years after the Federal Reserve cut short-term U.S. interest rates by three quarters of a percentage point. Earlier it launched a lending facility that allows investment banks to borrow money directly from the U.S. central bank.