* Staples, Office Depot in advanced merger talks - WSJ
* Stratasys drops after cutting outlook
* Factory orders fall for fifth straight month
* Indexes up: Dow 1 pct, S&P 0.61 pct, Nasdaq 0.1 pct (Adds factory orders data)
By Chuck Mikolajczak
NEW YORK, Feb 3 (Reuters) - U.S. stocks climbed on Tuesday, as the benchmark S&P 500 index built on a rally in the prior session fueled by hopes of a deal on Greek debt and by rising oil prices.
Stocks rallied late in Monday's session on signs Greece was softening its approach to debt negotiations. A source told Reuters that Greek Finance Minister Yanis Varoufakis, in London to reassure private investors he was not seeking a showdown with Brussels over a new debt agreement, said the new left-wing government would spare privately held bonds from losses.
However, the Greek proposal to swap government debt for bonds with interest payments linked to economic growth got a cool reception from euro zone officials on Tuesday.
Adding support to U.S. equities was a further gain in oil prices, with U.S. crude up 3.4 percent to $51.26 and Brent up 2.9 percent to $56.32. Shares of offshore contract driller Transocean gained 6.5 percent to $18.41.
"The market is beginning to see signs of some stability coming into oil and the Greek situation seems to be tilting towards the side of what the market is looking for, which is a retreat from its call for a debt writedown," said Andre Bakhos, managing director at Janlyn Capital LLC in Bernardsville, New Jersey.
"So the market is latching on to a better Greek situation."
The Dow Jones industrial average rose 174.36 points, or 1 percent, to 17,535.4, the S&P 500 gained 12.42 points, or 0.61 percent, to 2,033.27 and the Nasdaq Composite added 4.70 points, or 0.1 percent, to 4,681.39.
Stratasys shares plunged 34.1 percent to $52.76 after the company cut its 2014 adjusted profit estimates for a second time.
Office Depot shares surged 17.3 percent to $8.95 after the Wall Street Journal reported the company was in advanced talks to merge with Staples Inc. Staples shares jumped 10 percent to $18.85.
U.S. factory orders fell for a fifth straight month in December by a worse-than-expected 3.4 percent, but a smaller-than-previously reported drop in business spending plans supported views of a rebound in the months ahead.
January car sales by the three Detroit automakers topped analysts' expectations, buoyed by low gas prices and easy credit terms. Ford Motor gained 1.6 percent to $15.51, General Motors rose 2.2 percent to $33.84 and Fiat Chrysler climbed 1.9 percent to $13.76.
Advancing issues outnumbered declining ones on the NYSE by 2,214 to 709, for a 3.12-to-1 ratio on the upside; on the Nasdaq, 1,725 issues rose and 817 fell for a 2.11-to-1 ratio favoring advancers.
The benchmark S&P 500 index was posting 15 new 52-week highs and no new lows; the Nasdaq Composite was recording 45 new highs and 21 new lows. (Editing by Bernadette Baum)