* Dollar General offers to buy Family Dollar
* Russia says humanitarian convoy issue resolved, but no ceasefire
* Indexes up: Dow 0.77 pct, S&P 0.68 pct, Nasdaq 0.68 pct (Updates to market open, adds quote)
By Chuck Mikolajczak
NEW YORK, Aug 18 (Reuters) - U.S. stocks advanced on Monday, as the threat of an escalation of tensions in Ukraine appeared to diminish and the latest flurry of merger action supported equities.
Russia said all issues related to its humanitarian convoy to Ukraine had been resolved but said no progress has been made toward a ceasefire or political solution to the fighting in the east of the country after talks between Russia, Germany, France and Ukraine on Sunday.
However, the region remained unsettled as Ukraine accused pro-Russian rebels on Monday of hitting a refugee convoy of buses with rocket fire near the eastern city of Luhansk, but the separatists denied responsibility.
Mergers and acquisitions continue to flourish and provide a lift to equities.
Discount retailer Dollar General Corp offered to buy Family Dollar Stores Inc for $8.95 billion, trumping an offer by Dollar Tree Inc. Family Dollar shares gained 4.3 percent to $79.35 while Dollar General jumped 9.4 percent to $62.87 as the best performer on the S&P 500. The S&P retail index climbed 1.1 percent.
"People left Friday unsure of whether or not the Ukrainian conflict was escalating and they seem to have come back today thinking it's not," said Rick Meckler, president of LibertyView Capital Management in Jersey City, New Jersey.
"That has been the major driver, but then you have the usual suspects of what has supported this market all along - a somewhat improving economy and continued M&A activity, giving people confidence that higher stock prices are here to stay."
Sensors and electrical controls maker Sensata Technologies Holding NV said it would buy the Schrader group of companies for an enterprise value of $1 billion. Sensata shares rose 4.9 percent to $48.44.
Ingersoll-Rand Plc, a maker of heating and air conditioning systems, said it would buy Cameron International Corp's centrifugal compression unit for $850 million. Ingersoll shares gained 1.6 percent to $61.54 and Cameron shed 0.2 percent to $72.47.
The Dow Jones industrial average rose 128.17 points or 0.77 percent, to 16,791.08, the S&P 500 gained 13.31 points or 0.68 percent, to 1,968.37 and the Nasdaq Composite added 30.18 points or 0.68 percent, to 4,495.11.
In a relatively light week for economic data, investors will closely monitor the Aug. 21-23 annual meeting of top central bankers at Jackson Hole, Wyoming, for possible insight about the path for monetary policy.
Minutes from the Federal Reserve's July meeting will be released on Wednesday.
Earnings season will effectively draw to a close this week with results from retailers including Home Depot, Target Corp and Gap Inc.
According to Thomson Reuters data through Monday, of the 467 companies in the S&P 500 that have reported earnings, 67.9 percent have topped analyst expectations, besting the 63 beat rate since 1994 and the 67 percent rate for the past four quarters. (Reporting by Chuck Mikolajczak; Editing by Chizu Nomiyama and Nick Zieminski)