* Energy names rally despite continued drop in oil prices
* Otsuka to buy Avanir; Cypress Semi to buy Spansion
* Biogen rallies on favorable Alzheimer's drug data
* Indexes up: Dow 0.4 pct, S&P 0.5 pct, Nasdaq 0.4 pct (Updates to midday trading)
By Ryan Vlastelica
NEW YORK, Dec 2 (Reuters) - U.S. stocks rose on Tuesday as a pair of big M&A deals boosted market optimism and helped the market rebound from the broad decline in the previous session, which was the S&P 500's weakest day in a month.
The day's gains were broad, with nine of the 10 primary S&P 500 sectors higher. The only group to fall was telecom , off 1 percent. The sector is considered defensive.
Energy shares were the strongest sector on the day despite continued weakness in the price of crude oil. While oil fell 2 percent to $67.66 per barrel - extending a decline that has taken the commodity down more than 30 percent from a recent peak - the S&P energy sector reversed earlier losses and rose 1.5 percent.
"Valuations have gotten pummeled under the weight of declining crude prices, and it looks like investors are starting to nibble at the space," said Mark Luschini, chief investment strategist at Janney Montgomery Scott in Philadelphia. "The group looks extremely oversold, and dividends remain pretty strong."
Among the most active names, Marathon Petroleum rose 4.7 percent to $95.07, while Valero Energy was up 3.8 percent at $50.77.
There is currently an inverse correlation of -0.8 between the S&P 500 and crude oil, a dramatic flip from Oct. 20, when the correlation was a positive 0.9, indicating they moved almost perfectly in sync.
Cypress Semiconductor Corp agreed to buy Spansion Inc in an all-stock deal valued at about $4 billion. Separately, Otsuka Pharmaceutical Co Ltd said it would buy Avanir Pharmaceuticals Inc for about $3.5 billion.
Cypress rose 16 percent to $12.08, while Spansion was up 23 percent at $28.09 on heavy volume. Avanir added 13 percent to $16.92.
Biogen Idec Inc advanced 5.7 percent to $326.07 as the S&P's biggest advancing stock on favorable data from the Phase III trial of an Alzheimer's drug.
Digital Ally jumped 41 percent to $18.16 on heavy volume a day after U.S. President Barack Obama urged lawmakers to spend $263 million over three years on 50,000 body-worn cameras and law enforcement training programs as part of the federal response to civil rights protests in Ferguson, Missouri.
At 12:19 p.m. (1719 GMT) the Dow Jones industrial average rose 63.54 points, or 0.36 percent, to 17,840.34, the S&P 500 gained 9.68 points, or 0.47 percent, to 2,063.12, and the Nasdaq Composite added 20.18 points, or 0.43 percent, to 4,747.52.
Advancing issues outnumbered declining ones on the NYSE by 2,057 to 933, for a 2.20-to-1 ratio on the upside; on the Nasdaq, 1,839 issues rose and 765 fell for a 2.40-to-1 ratio favoring advancers.
The benchmark S&P 500 index was posting 67 new 52-week highs and two new lows; the Nasdaq Composite was recording 79 new highs and 72 new lows. (Editing by Nick Zieminski; and Peter Galloway)