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DJI- NEW YORK, Aug 7 (Reuters) - U.S. stocks rose for a third straight day on Tuesday, pushing the S&P above 1,400 for the first time since early May, on growing optimism the European Central Bank would act soon to contain the euro zone's debt crisis.

Trading was light, which could distort the level of optimism investors truly have that Europe will follow through with adequate measures. ECB President Mario Draghi boosted hopes last week when he spoke of restoring calm to the euro zone's troubled bond markets.

Since then, good news from Greece and declines in borrowing costs for Spain and Italy from peaks above 7 percent have kept sentiment positive. The relative calm allowed the S&P to break through the psychologically important 1,400 level after trying unsuccessfully the past couple of sessions.

"If the ECB expands its balance sheet, it will keep pushing these bond yields lower, which can help these countries finance their debt, giving markets a bit of reprieve," said Joseph Tanious, global market strategist at J.P. Morgan Funds in New York. "It's likely we won't get anything official for a few weeks, and until then investors are likely to be skittish."

Summer holidays have added to light trading volume, which has contributed to volatility. Equities cut their gains just before the close on Tuesday, mirroring Monday's late-day action.

About 6.39 billion shares traded on the New York Stock Exchange, the American Stock Exchange and Nasdaq, below last year's daily average of 7.84 billion.

The real tests for markets may come in September. The ECB is expected to face decisions about controlling the euro zone debt crisis and the Federal Reserve could take stimulus actions to aid the flagging U.S. economic recovery.

The Dow Jones industrial average .DJI rose 51.09 points, or 0.39 percent, at 13,168.60. The Standard & Poor's 500 Index .SPX was up 7.12 points, or 0.51 percent, at 1,401.35. The Nasdaq Composite Index .IXIC was up 25.95 points, or 0.87 percent, at 3,015.86.

Despite worries over the economies of Europe and the United States, investors have pushed the S&P 500 up more than 11 percent so far this year. Yield-hungry investors have kept buying stocks as U.S. and German government bond prices soar and yields hit historic lows.

Tuesday's advance was led by stocks in cyclical sectors like energy, materials and consumer discretionary, while defensive sectors like telecoms and utilities edged lower.

"Despite what seems like a weekly scandal of some sort, the banks have posted incredibly large profits. The Fed has made it very easy for them to take on very little risk and make very large profits," said Randy Frederick, managing director of active trading and derivatives for Charles Schwab in Austin, Texas.

With 82 percent of S&P companies having reported quarterly results, 68 percent have beaten profit expectations, according to Thomson Reuters data.

Pfizer PFE.N and Johnson & Johnson JNJ.N scrapped further studies of an experimental drug for Alzheimer's disease after the drug failed in a second trial. U.S.-traded shares of their partner, Elan Corp ELN.N, dropped 0.9 percent to $11.15. Pfizer fell 2.1 percent to $23.74 and J&J edged 0.8 percent lower to $68.29. (nL2E8J6DQ5)

A group of investors rescued Knight Capital Group KCG.N in a $400 million deal that kept the market maker in business, but existing shareholders were nearly wiped out. Knight closed 0.3 percent lower at $3.06, erasing gains of more than 3 percent from earlier in the session. (nL2E8J60KK)

About 62 percent of stocks on the New York Stock Exchange closed higher while 61 percent of Nasdaq-listed stocks finished up.

* Updated midday forecasts called for wetter weather in the U.S. Midwest this week, which should help late-planted soybeans but arrive too late for most of the drought-stressed corn crop - meteorologist. (nL2E8J72GA)

• Trade was thin, with daily volume in soybean futures about 20 percent below the prior 250-day average.

• Traders awaiting USDA's monthly supply/demand reports on Friday. Analysts expect USDA to lower its forecasts of U.S. soybean production, yield and harvested acreage, as well as ending stocks for both 2011/12 and 2012/13. (nL2E8J7353)

• Soybean stocks in the leading South American producers have dropped by about a third since one year ago, shifting global demand to the United States at a time of concern the U.S. soy crop will also fall - analysts Oil World. (nL6E8J77IE)

• Tight global supplies mean soybean futures contracts have limited potential to fall up to January 2013 although they could face temporary selling pressure after touching record levels - Oil World. (nL6E8J6AY9)

• USDA late Monday said 29 percent of the U.S. soybean crop was rated in good to excellent condition, unchanged from the previous week -- halting a string of six weeks of decline. US/SOY

• CBOT reported no deliveries against August soybean or soymeal futures, while soyoil deliveries totaled 1,155 contracts.

Investors also avoided taking risky positions ahead of key reports later in the week. Industry regulator Malaysian Palm Oil Board (MPOB) will release official stocks and output data on Friday, and traders expect a recovery in stocks after a 14-month low in June.

A monthly supply and demand report due later this week from the U.S. Department of Agriculture (USDA) could also provide some clues on soybean production trends and the extent of drought damage.

"The market is exercising caution here ahead of MPOB and USDA data," said a dealer with a foreign commodities brokerage in Malaysia.

"The crop rating was rather neutral despite some rains reported over the weekend," he added, referring to the unchanged weekly soybean crop condition rated by the USDA. (nL2E8J635O)

The benchmark October palm oil futures FCPOc3 on the Bursa Malaysia Derivatives Exchange closed 0.4 percent lower at 2,907 ringgit ($938) per tonne. Prices earlier touched a low at 2,897 ringgit, a level last seen on July 27.

Total traded volume came in at 23,574 lots of 25 tonnes each, fewer than the usual 25,000 lots.

The supply-demand report from the USDA later this week could offer more clues for traders on the extent of soy crop damage from the worst drought in 56 years.

A lower quality of soybean crop, leading to a smaller supply of soybean oil, could shift more vegetable oil demand to the cheaper palm oil.

Market participants are also looking out for the Malaysian palm oil export figures for the Aug 1-10 period.

Exports in July suffered a double-digit monthly decline and could lead to higher stocks especially on the back of higher production for the month. PALM/ITS PALM/SGS

REGIONAL EQUITY- Aug 7 (Reuters) - Most Southeast Asian stock markets eased on Tuesday with Singapore falling from a one-year high, but foreign investors bought into equities in Indonesia and Malaysia amid hopes that Europe will take further action to tackle its debt crisis helped sentiment.