* S&P 500 bounces back from biggest daily drop since Nov. 7
* Possible stalemate in Italy remains a concern
* Home Depot rises as profit, sales top expectations
* Dow up 0.8 pct, S&P 500 up 0.6 pct, Nasdaq up 0.4 pct
By Chuck Mikolajczak
NEW YORK, Feb 26 (Reuters) - U.S. stocks rebounded from their worst decline since November on Tuesday after Federal Reserve Chairman Ben Bernanke defended the Fed's bond-buying stimulus and sales of new homes hit a 4 1/2-year high.
The S&P 500 had climbed 6 percent for the year and came within reach of all-time highs before the minutes from the Fed's January meeting were released last Wednesday. Since then, the benchmark S&P 500 has fallen 1 percent.
Bernanke, in testimony on Tuesday before the Senate Banking Committee, strongly defended the Fed's bond-buying stimulus program and quieted rumblings that the central bank may pull back from its stimulative policy measures, which were sparked by the release of the Fed minutes last week.
Bernanke's comments helped ease investors' concerns about a stalemate in Italy after a general election failed to give any party a parliamentary majority, posing the threat of prolonged instability and financial crisis in Europe, and sending the S&P 500 to its worst decline since Nov. 7 in Monday's session.
Bernanke "certainly said everything the market needed to feel in order to get comfortable again," said Peter Kenny, managing director at Knight Capital in Jersey City, New Jersey.
"The fear is we were going to see a rollover, and the first shot over the bow was what we saw out of Italy yesterday with the elections," Kenny said. "When it came to U.S. markets, we saw some of that bleeding stop because our focus shifted from the Italian political circus to Ben Bernanke."
Gains in homebuilders and other consumer stocks, following strong economic data, lifted the S&P 500, and a 5.7 percent jump in Home Depot to $67.56 boosted the Dow industrials. The PHLX housing sector index rose 3.2 percent.
Economic reports that showed strength in housing and consumer confidence also supported stocks. U.S. home prices rose more than expected in December, according to the S&P/Case-Shiller index. Consumer confidence rebounded in February, jumping more than expected, and new-home sales rose to their highest in 4-1/2 years in January.
However, the central bank chairman also urged lawmakers to avoid sharp spending cuts set to go into effect on Friday, which he warned could combine with earlier tax increases to create a "significant headwind" for the economic recovery.
The Dow Jones industrial average gained 115.96 points, or 0.84 percent, to 13,900.13 at the close. The Standard & Poor's 500 Index rose 9.09 points, or 0.61 percent, to 1,496.94. The Nasdaq Composite Index advanced 13.40 points, or 0.43 percent, to close at 3,129.65.
Despite the bounce, the S&P 500 was unable to move back above 1,500, a closely watched level that was technical support until recently, but could now serve as a resistance point.
The CBOE Volatility Index or the VIX, a barometer of investor anxiety, dropped 11.2 percent, a day after surging 34 percent, its biggest percentage jump since Aug. 18, 2011.
The uncertainty caused by the Italian elections continued to weigh on stocks in Europe. The FTSEurofirst-300 index of top European shares closed down 1.4 percent. The benchmark Italian index tumbled 4.9 percent.
Home Depot gave the biggest boost to the Dow and provided one of the biggest lifts to the S&P 500 after the world's largest home improvement chain reported adjusted earnings and sales that beat expectations.
Macy's shares gained 2.8 percent to $39.59 after the department-store chain stated it expects full-year earnings to be above analysts' forecasts because of strong holiday sales.
Volume was active with about 7.08 billion shares traded on the New York Stock Exchange, NYSE MKT and Nasdaq, above the daily average of 6.48 billion.
Advancing stocks outnumbered declining ones on the NYSE by a ratio of about 2 to 1, while on the Nasdaq, three stocks rose for every two that fell.