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NEW YORK (Reuters) - U.S. stocks kicked off the new year with their best day in over a year on Wednesday, sparked by relief over a last-minute deal in Washington to avert the "fiscal cliff" of tax hikes and spending cuts that threatened to derail the economy's growth.
In 2013's first trading session, the S&P 500 achieved its biggest one-day gain since December 20, 2011, pushing the benchmark index to its highest close since September 14.
Concerns over Washington's ability to sidestep the cliff had driven the S&P 500 down for five straight sessions, before signs that a resolution was near sent the benchmark index higher on the final trading session of 2012.
The CBOE Volatility Index or the VIX, Wall Street's favorite gauge of investor anxiety, dropped 18.5 percent to 14.68 at the close. The VIX has fallen 35.4 percent over the past two sessions, the biggest 2-day percentage drop in the history of the index.
The Dow Jones industrial average jumped 308.41 points, or 2.35 percent, to 13,412.55 at the close. The Standard & Poor's 500 Index gained 36.23 points, or 2.54 percent, to finish at 1,462.42. The Nasdaq Composite Index climbed 92.75 points, or 3.07 percent, to end at 3,112.26.
U.S. markets were closed on Tuesday for New Year's Day.
Market breadth reflected the strong rally, with 10 stocks rising for every one that fell on the New York Stock Exchange. All 10 of the S&P 500 industry sector indexes gained at least 1 percent. The S&P financial index shot up 2.9 percent.
The S&P Information Technology index gained 3.2 percent, including Hewlett-Packard (HPQ.N), which climbed 5.4 percent to $15.02. HP's gain followed a miserable 2012 when the stock fell nearly 45 percent as one of the S&P 500's worst performers for 2012.
On Tuesday, Congress passed a bill to prevent huge tax hikes and delay spending cuts that would have pushed the world's largest economy off a "fiscal cliff" and possibly into recession.
The vote avoided steep income-tax increases for a majority of Americans, but failed to resolve a major showdown over cutting the budget deficit, leaving investors and businesses with only limited clarity about the outlook for the economy. Spending cuts of $109 billion in military and domestic programs were temporarily delayed, and another fight over raising the U.S. debt limit also looms.
"We got through the fiscal cliff. The next big thing, and probably more contentious thing, is negotiating the debt ceiling and possibly entitlement reform in early 2013," said Jim Russell, senior equity strategist for U.S. Bank Wealth Management in Cincinnati.
Hard choices about budget cuts and the critical need to raise the debt ceiling will confront Congress about the same time in two months "so the fur will be flying," Russell said.
U.S. stocks ended 2012 with the S&P 500 up 13.4 percent for the year, as investors largely shrugged off worries about the fiscal cliff. For the year, the Dow gained 7.3 percent and the Nasdaq jumped 15.9 percent.
Bank shares rose following news that U.S. regulators are close to securing another multibillion-dollar settlement with the largest banks to resolve allegations that they unlawfully cut corners when foreclosing on delinquent borrowers.
Shares of Zipcar Inc ZIP.O surged 47.8 percent to $12.18 after Avis Budget Group Inc (CAR.O) said it would buy Zipcar for about $500 million in cash to compete with larger rivals Hertz and Enterprise Holdings Inc. Avis advanced 4.8 percent to $20.77.
Shares of Apple (AAPL.O) rose 3.2 percent to $549.03, helping to lift the S&P information technology index up 3.2 percent following a report that the most valuable tech company has started testing a new iPhone and a new version of its iOS software.
Economic data from the Institute for Supply Management showed U.S. manufacturing ended 2012 on an upswing despite fears about the fiscal cliff, but the Commerce Department reported that construction spending fell in November for the first time in eight months.
Volume was heavy, with about 7.8 billion shares traded on the New York Stock Exchange, the NYSE MKT and the Nasdaq, well above the 2012 daily average of 6.42 billion.
Reporting by Chuck Mikolajczak; Editing by Jan Paschal