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* Brent crude nears $60 as output cut deal takes effect
* Banks stocks gain on Barclays price target raise
* Xerox top gainer on S&P after separation of Conduent
* Indexes up: Dow 0.72 pct, S&P 0.72 pct, Nasdaq 0.71 pct (Updates to open)
By Yashaswini Swamynathan
Jan 3 (Reuters) - Wall Street made big gains on Tuesday, its first day of trading in 2017, with all eyes on the Dow Jones Industrial Average as it zeroes in on the historic 20,000 mark.
After coming within a hair's breadth of the milestone in December as part of a post-election rally, the Dow was trading just 0.46 percent shy of the psychological milestone.
The Dow rose 13.4 percent in 2016 - its best performance in three years - registering strong gains in the past two months as investors bet that Presidential-elect Donald Trump would introduce market friendly policies such as tax cuts and simpler regulation.
Banks were the main drivers of the gains on Wall Street on Tuesday, with the S&P 500 financial sector rising 1.33 percent. Barclays raised price targets on several Wall Street banks including Bank of America, Wells Fargo and JPMorgan.
Goldman Sachs rose 1.5 percent to $243.50 and was the top stock on the Dow.
Feeding Wall Street's gains were oil prices, which hit an 18-month high as a deal to cut output took effect on Sunday, and upbeat China factory data.
The dollar index was on a tear, notching its best day in nearly three weeks at 103.37, while higher inflation data sent European stocks to a one-year high.
At 9:40 a.m. ET (1440 GMT), the Dow was up 143.1 points, or 0.72 percent, at 19,905.7, the S&P 500 was up 16.11 points, or 0.72 percent, at 2,254.94 and the Nasdaq Composite index was up 38.05 points, or 0.71 percent, at 5,421.16.
Ten of the 11 major S&P 500 indexes were higher, with the defensive real estate and consumer staples sectors bringing up the rear.
Utilities, another defensive sector, was the only one in the red.
Marathon Petroleum rose 6.8 percent to $53.74 after the company said it would explore a spinoff of its retail business, caving to pressure from activist investor Elliott Management.
Xerox was the biggest percentage gainer on the S&P, rising nearly 16 percent, after the company said it completed the separation of its BPO unit Conduent.
Advancing issues outnumbered decliners on the NYSE by 2,121 to 597. On the Nasdaq, 1,900 issues rose and 545 fell.
The S&P 500 index showed 13 new 52-week highs and one new lows, while the Nasdaq recorded 73 new highs and six new lows. (Reporting by Yashaswini Swamynathan in Bengaluru; Editing by Saumyadeb Chakrabarty)