A milder-than-expected gain in the Consumer Price Index took the edge off fears of an inflationary spurt triggered by soaring energy prices. That could allow the Federal Reserve more time to hold interest rates steady, analysts said.

Shares of retailers and home builders, which benefit from steady to lower borrowing costs, advanced. The S&P retail index rose 1.6 per cent, as Macy's stood by the profit forecast for its department stores despite expectations of an economic slowdown.

Freddie Mac, seen as a housing market barometer, brightened the mood on Wall Street by raising its growth outlook and unveiling a plan to raise new capital to support the beleaguered home loan market.

'People were nervous about the inflation number. When it was somewhat better than expected, that triggered the rally,' said Mr Eric Kuby, chief investment officer at North Star Investment Management, in Chicago.

Stocks pared gains late in the session, leaving the Nasdaq just barely higher. Shares of Apple slid as investors took profits after two days of gains in the stock.

The market's sharp climb 'ran out of steam without another leg of news to keep the rally going,' Mr Kuby said.

The Dow Jones industrial average rose 66.20 points, or 0.52 per cent, to end at 12,898.38. The Standard & Poor's 500 Index added 5.62 points, or 0.40 per cent, to 1,408.66. The Nasdaq Composite Index inched up 1.58 points, or 0.06 per cent, to 2,496.70.

Trading was extremely light on the New York Stock Exchange, with about 1.19 billion shares changing hands, well below last year's estimated daily average of roughly 1.90 billion, and the second-lowest level of volume so far this year. NYSE trading volume hit its low for the year on Monday, when 1.05 billion shares traded hands.

However, the Chicago Board Options Exchange Volatility Index, or VIX, which is Wall Street's fear barometer, slid at one point to its lowest level since October 2007 as stocks rallied. The VIX was down 1.8 per cent at the close.

Shares of Macy's rose 3.6 per cent to US$24.93 (S$34.37).

Freddie Mac, the No. 2 provider of funding for US residential mortgages, shot up 9.2 per cent to US$27.25.

The Dow Jones home construction Index climbed 2.7 per cent.

The stock of DR Horton, the largest US home builder, jumped 2.9 per cent to US$15.36.

Apple falls, energy slips
On the Nasdaq, shares of Apple declined 2 per cent to US$186.26. And the stock of top video game publisher Electronic Arts Inc dropped 3.3 per cent to US$52.78. Late on Tuesday, the company issued an annual profit outlook that fell short of Wall Street forecasts.

Energy companies' stocks also fell after US crude slid US$1.58 to settle at US$124.22 per barrel, a day after it approached a record just 2 cents shy of US$127. The S&P energy index ended down 0.9 per cent.

Shares of Deere & Co tumbled 9.9 per cent to US$81.25 and ranked among the top drags on the S&P 500 after the farm and construction machinery company warned that higher material costs and possible shortages of components will affect results Among other drags on Nasdaq: Whole Foods Market sank 13.9 percent to US$28.96 after it posted a lower quarterly net profit that missed analysts' estimates.

Before the opening bell, the Labour Department said the overall CPI for April rose 0.2 per cent - less than economists expected. Core CPI, excluding volatile food and energy costs, gained 0.1 per cent in April - also below forecast.

The Fed's seven rate cuts, amounting to 3.25 percentage points, have now taken the Fed's benchmark fed funds rate down to 2 per cent. The Fed's most recent rate decision, which analysts speculated could be the last for the near term, was on April 30. -- REUTERS