* Italian 10-yr yield at lowest in two years
* Kohl's, Target shares fall after November sales data
* Pending home sales data on tap
* Indexes up: Dow 0.4 pct, S&P 0.5 pct, Nasdaq 0.7 pct
NEW YORK, Nov 29 (Reuters) - U.S. stocks rose in early trading on Thursday on optimism that Congress was progressing toward a fiscal agreement in Washington that would avert a possible recession.
Market participants are focused on discussions in Congress over avoiding big spending cuts and tax hikes, known as the "fiscal cliff," beginning in January. Still, equities may retreat, as they did Tuesday, if the upbeat negotiation environment in Washington deteriorates.
"There will be a deal before December 31 to avert the economy facing disaster," said Peter Cardillo, chief market economist at Rockwell Global Capital in New York.
"We're back on track for a year-end rally to continue," he said.
The yield on Italy's 10-year bonds fell to the lowest in two years at an auction, amid relief that immediate risks over Greece had diminished.
"The fact that the bond sales in Europe went well suggest confidence is beginning to reenter some of the peripheral nations and that is a good sign," Cardillo said.
The euro briefly touched the $1.30 level and is near its highs for November, boosting commodity prices. The S&P materials sector index led gains with a 0.8 percent advance.
The Dow Jones industrial average rose 50.15 points, or 0.39 percent, to 13,035.26. The S&P 500 gained 7.07 points, or 0.50 percent, to 1,417.00. The Nasdaq Composite added 20.21 points, or 0.68 percent, to 3,011.99.
Equity markets may also be supported by data showing the U.S. economy grew faster than first reported between July and September. Separate data showed the number of Americans filing new claims for unemployment benefits dropped for a second week, and a larger-than-expected 3.3 percent advance in third-quarter corporate profits.
Due for release later Thursday are pending home sales for October, at 10:00 a.m. (1500 GMT), and the Federal Reserve Bank of Kansas City November manufacturing survey at 11:00 a.m.
Kroger, the biggest U.S. supermarket operator, added 3.3 percent to $25.89 after reporting earnings.
Tiffany shares slumped 7.9 percent to $58.72 after the upscale jeweler reported quarterly results and cut its full-year sales and profit forecasts.
Top retailers said weak sales in early November, after superstorm Sandy, were a drag on the month. Target fell 2 percent and Kohl's Corp dropped 10.3 percent.
U.S.-listed shares of BlackBerry maker Research In Motion surged 8.5 percent to $12.06 after Goldman Sachs upgraded the stock to "buy" from "neutral."