* FOMC begins two-day policy meeting
* Oracle climbs after results
* Walgreen off as it posts earnings, to buy European chain
* Indexes up: Dow 0.9 pct, S&P 0.9 pct, Nasdaq 1.1 pct (Updates to late morning)
By Rodrigo Campos
NEW YORK, June 19 (Reuters) - U.S. stocks rallied on Tuesday on hopes that the Federal Reserve’s policy meeting will agree on extending stimulus measures as the economy struggles to recover.
A sharp decline in German business sentiment, alongside stubbornly high Spanish bond yields, raised expectations for market-friendly stimulus from European policymakers as well.
Growth-related stocks led the rally, with the S&P materials sector up 1.7 percent and the financial sector up 1.5 percent. U.S. Steel Corp jumped 5.4 percent to $19.41 and Bank of America added 4.8 percent to $8.13.
The Federal Open Market Committee was to begin the first day of a two-day meeting on interest rate policy, with expectations increasing that the U.S. central bank may extend its “Operation Twist” program, its effort to drive down long-term borrowing costs.
“Lower Spanish yields have calmed world markets and optimism over some type of stimulus from the Fed tomorrow is sparking strong buying today,” said Ryan Detrick, senior technical strategist at Schaeffer’s Investment Research in Cincinnati.
The Dow Jones industrial average rose 109.32 points, or 0.86 percent, to 12,851.18. The S&P 500 Index gained 12.62 points, or 0.94 percent, to 1,357.40. The Nasdaq Composite added 31.83 points, or 1.10 percent, to 2,927.16.
Spain’s government bond yields eased slightly after it raised 3 billion euros at a short-term debt sale, with the higher yields enticing investors. However, with its 10-year bond yield above 7 percent, investors worried over how long the euro zone’s fourth-largest economy can survive without foreign help.
In Greece, political parties said they expected to form a coalition government soon and then seek concessions to the austerity measures that are both keeping the country away from bankruptcy and mired in a very long recession.
Oracle Corp rose 2.8 percent to $27.88 a day after it reported stronger-than-expected quarterly profit, releasing the results three days ahead of schedule after news of the pending departure of a senior sales executive fueled concerns that business was stagnating.
Walgreen Co tumbled 6.2 percent to $29.99 after the pharmacy chain reported quarterly earnings and said it would buy a 45 percent stake in Alliance Boots for $6.7 billion in a cash and stock deal.
FedEx Corp rose 2.9 percent to $91.80 after the package delivery company reported fourth-quarter earnings and provided an outlook for the first-quarter and 2013.
Economic data showed U.S. housing starts fell in May from a 3-1/2 year high, but permits to build new homes rose sharply, suggesting the housing recovery remains on track. (Reporting by Rodrigo Campos, Additional reporting by Chuck Mikolajczak, editing by Dave Zimmerman)