* Cisco shares jump on outlook, lift S&P and Nasdaq

* Oil touches three-month low below $118

* Freddie Mac posts loss, will slash dividend

* Dow up 0.4 pct, S&P up 0.3 pct, Nasdaq up 1.2 pct (Updates to close)

By Kristina Cooke

NEW YORK, Aug 6 (Reuters) -U.S. stocks rose on Wednesday, building on the previous day's big gains, as a further drop in oil prices and a reassuring outlook from Cisco Systems (CSCO.O: Quote, Profile, Research) overshadowed persistent credit concerns.

Cisco, the maker of equipment that directs Web traffic, set the tone for tech shares after it posted a stronger-than-expected quarterly profit and said it expects the weak economic environment to be relatively short lived. Its shares jumped nearly 6 percent.

A drop in the price of oil to a three-month low below $118 a barrel helped the broader market recover from early declines sparked by home finance company Freddie Mac's wider-than-expected loss. Freddie (FRE.N: Quote, Profile, Research) also set plans to slash its dividend by at least 80 percent as it braced for a prolonged housing crisis.

"It's good to see the market holding onto yesterday's gains. Cisco is probably responsible for much of the Nasdaq's move," said John Forelli, portfolio manager at Independence Investments LLC in Boston.