* China cuts interest rate for second time in two months
* Oil prices rebound but still near 6-1/2-year lows
* Apple up 5.5 pct, BofA leads banks higher
* Indexes up: Dow 2.26 pct, S&P 2.34 pct, Nasdaq 3.34 pct (Adds details, updates prices)
By Tanya Agrawal
Aug 25 (Reuters) - Wall Street posted its sharpest rally of the year on Tuesday, as investors snapped up beaten-down stocks a day after the market's worst performance in four years on fears about China's economy.
Financial markets also got a boost from China's second interest rate cut in two months.
The Nasdaq composite index led stocks higher with a 3.3 percent rise, boosted by Apple's 5.5 percent jump to $108.86.
The stock slumped as much as 13 percent on Monday, when the Dow Jones industrial average fell more than 1,000 points in its biggest intraday fall ever and the S&P 500 recorded its worst day since 2011.
Analysts were cautious, however, and even with Tuesday's gains, the Dow and the S&P were on track for the their worst monthly losses since February 2009 and the Nasdaq for its steepest drop since November 2008.
"Today's rally can be attributed to value hunters who are slowly moving into the market as valuation levels now seem reasonable," said Terry Sandven, chief equity strategist at U.S. Bank Wealth Management in Minneapolis, while warning that a "wall of uncertainty" about global growth remains.
JPMorgan cut its forecast for their year-end target for the S&P 500 to 2,150 from 2,250.
At 12:47 p.m. ET (1617 GMT), the S&P 500 was up 44.23 points, or 2.34 percent, at 1,937.44, the Dow was up 358.9 points, or 2.26 percent, at 16,230.25 and the Nasdaq was up 151.29 points, or 3.34 percent, at 4,677.53.
The brokerage lowered its weightings for the energy, financial and industrial sectors but raised consumer and health, suggesting these companies are better able to withstand a slowdown in global growth.
Data on Tuesday showed U.S. consumer confidence increased to a seven-month high in August.
The move by China's central bank came after Chinese stocks slumped 8 percent on Tuesday following an 8.5 percent drop on Monday.
"What we need to see to calm investors is positive economic data points out of China and only when we see that will the rallies be sustainable," said Xavier Smith, investment director at Centre Asset Management.
"Right now, it's pretty meaningless," he said of the interest rate cut.
Nine of the 10 major S&P sectors were higher at midday, with the technology index's 3.4 percent rise leading the advancers. The utilities sector was the laggard.
U.S. banks rose along with expectations of a rate hike this year, with Bank of America up 5.1 percent at $16.07.
U.S. oil prices were up about 3 percent, bouncing back from heavy losses on Tuesday, but was still below $40 per barrel.
Reflecting the easing of volatility, the CBOE volatility index was down about 11 points at 29.82 and on track for its largest one-day drop in four years. The index hit a six-and-a-half year high of 53.29 on Monday.
Trading in options painted a mixed picture, with some traders keeping hedges in place and others closing existing positions or placing some speculative trades, Susquehanna derivatives strategist Christopher Jacobson said.
New U.S. single-family home sales rebounded in July, adding to evidence of underlying strength in the economy that could allow the Federal Reserve to raise interest rates this year.
Traders now see a 26 percent chance that the Fed would increase rates in September, up from 22 percent on Monday, according to overnight indexed swap rates.
The dollar, which fell to a 7-month low against a basket of currencies on Monday, was up more than 1.4 percent.
Among the big gainers, Facebook was up 5.7 percent at $86.81 and Netflix 9.4 percent at $106.
Best Buy jumped 15.3 percent to $33.74 after the owner of the biggest U.S. electronics chain reported an unexpected increase in quarterly sales.
Advancing issues outnumbered decliners on the NYSE by 2,528 to 531. On the Nasdaq, 2,276 issues rose and 533 fell.
The S&P 500 index showed one new 52-week highs and seven new lows, while the Nasdaq recorded seven new highs and 55 new lows. (Additional reporting by Saqib Iqbal Ahmed in New York; Editing by Savio D'Souza and Saumyadeb Chakrabarty)