By Deborah Jian Lee

Consumer prices in June rose by the most since the aftermath of Hurricane Katrina in September 2005, adding more pressure to an economy beset with a stressed banking system and the worst housing downturn in decades.

Even so, shares of financial services companies rose as investors bought the beaten-down sector, with shares of Wells Fargo up 24 percent to lead the S&P 500's advance. The S&P financial index <.GSPF> rose 6.2 percent while the KBW bank index <.BKX> shot up 9.3 percent.

The stocks of embattled mortgage giants Freddie Mac and Fannie Mae also mounted a recovery, with Fannie Mae up 16 percent at $8.21 and Freddie Mac up 16 percent at $6.10.

Investors appeared to be pulling money away from energy shares into financials, with oil prices heading lower. Crude for August delivery slid $4.12 to $134.62 a barrel.

"What's taking place today is a market recovery driven by financials and a continued drop in oil prices," said Subodh Kumar, chief investment strategist at Subodh Kumar & Associates, in Toronto.

"But the sentiment right now is very volatile."

The Dow Jones industrial average <.DJI> jumped 142.40 points, or 1.30 percent, to 11,104.94. The Standard & Poor's 500 Index <.SPX> gained 12.76 points, or 1.05 percent, to 1,227.67. The Nasdaq Composite Index <.IXIC> climbed 35.46 points, or 1.60 percent, to 2,251.17.

Wells Fargo, the fifth-largest U.S. bank, reported better-than-expected quarterly results on Wednesday and raised its dividend despite a 23 percent decline in profit caused by a surge in bad loans.

The results offered some comfort to investors worried about the impact of the credit crisis on the financial sector.

Wells Fargo shares climbed as high intraday as $25.87 on the New York Stock Exchange, and at midday, they were up 24.5 percent at $25.53.

In a testimony before the U.S. House Financial Services Committee, Federal Reserve Chairman Ben Bernanke said Fannie Mae and Freddie Mac are adequately capitalized and face no danger of failing.

Standouts among financials include shares of Bank of America , the No. 2 U.S. bank, up 9 percent at $20.18.

Shares of JPMorgan Chase , the No. 3 U.S. bank, rose 8.3 percent to $33.60 and topped the list of the Dow's major advancers.

Charles Schwab said on Wednesday that second-quarter profit edged higher as the discount broker added more client accounts, despite battered financial markets and a slowing U.S. economy. Charles Schwab's stock jumped 8.4 percent to $20.84 on the Nasdaq.

In other encouraging news, Alpha Natural Resources Inc shares rose after mining company Cleveland-Cliffs said on Wednesday it would acquire the Appalachian coal producer for about $10 billion in cash and stock to expand its coal assets. Alpha Natural Resources Inc shares surged 10.3 percent to $104.61 on the NYSE.

Shares of retailers also advanced as receding oil prices would ease the strain of high energy costs on consumers. The S&P retail index <.RLX> rose 3.3 percent.

On Nasdaq, shares of internet retailer Amazon.com jumped 7.1 percent to $71.80. Shares of programmable chip maker Altera Corp rose 14 percent to $21.89, a day after the company posted a stronger-than-expected quarterly profit.

(Editing by Jan Paschal)