By Walter Brandimarte (Reuters)

NEW YORK, Aug 8 - U.S. stocks jumped on Friday as the U.S. dollar's rally helped push oil prices down to nearly $116 a barrel, reducing inflation fears and improving prospects for stronger business and consumer spending.

A slide of nearly $4 in U.S. crude oil CLc1 prices overshadowed earlier news that Fannie Mae (FNM), the biggest buyer of U.S. home mortgages, had posted a steeper-than-expected quarterly loss, fueled by rising defaults.

Big manufacturers gave the biggest boost to the S&P 500, with shares of General Electric (GE) and Procter & Gamble (PG) gaining more than 2 percent. Microsoft (MSFT) and Cisco Systems (CSCO) also drove the market higher, in a sign of optimism related to business spending.

Consumer-oriented companies were standouts, including retailers, with J.C. Penney Co Inc (JCP) up over 7 percent.

Shares of banks also advanced as prospects for lower inflation will make it easier for the Federal Reserve to postpone interest-rate increases, at a time when the financial sector is still struggling with tighter credit conditions.

"We think that the general market is being moved along by the surprising strength of the dollar, which is exacerbating the slide in oil prices -- so all positive for stocks," said Bruce Zaro, chief technical strategist with Delta Global Advisors in Boston.

"And I think the trend in stocks is up. I do feel that July 15 represented the bottom for stocks and we are going to move higher."

The Dow Jones industrial average .DJI climbed 234.49 points, or 2.05 percent, to 11,665.92, while the Standard & Poor's 500 Index .SPX gained 22.24 points, or 1.76 percent, to 1,288.31. The Nasdaq Composite Index .IXIC rose 46.29 points, or 1.96 percent, to 2,402.02.

The fall in oil came as the dollar notched broad gains, pressuring global commodity prices. U.S. front-month crude CLc1 dropped $3.97 to $116.05 a barrel, more than 20 percent below its July record high.

GE shares rose 3.2 percent to $29.50 while Procter & Gamble gained 2.5 percent to $69.12, both on the New York Stock Exchange. Both are among the 30 stocks that make up the Dow industrials.

Shares of Microsoft climbed 2.2 percent to $28.00 and Cisco rose 2.9 percent to $24.27, both on Nasdaq. The stocks were among those giving the biggest boosts to both the S&P 500 and the Nasdaq 100.

McDonald's Corp (MCD), a Dow component, jumped 5.4 percent to $65.18 after the world's largest fast-food restaurant company posted stronger-than-expected July sales from restaurants open at least 13 months.

Shares of MBIA Inc (MBI) spurred gains in the financial sector after the world's largest bond insurer posted a higher-than-expected quarterly profit, helped by an accounting change that turned credit problems into a big gain.

MBIA's shares shot up 8.9 percent to $9.02, the highest percentage gain among the components of the S&P financial sector index , which rose 2.22 percent.

But shares of Fannie Mae dropped 8.9 percent to $9.06 after the company posted a fourth straight quarterly loss and slashed its dividend by more than 85 percent to conserve capital.