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* AT&T to buy T-Mobile USA from Deutsche Telekom
* Buffett: Japan quake is "buying opportunity" in stocks
* Indexes up: Dow 1.5 pct, S&P 1.5 pct, Nasdaq 1.8 pct (Updates to close)
By Chuck Mikolajczak
NEW YORK, March 21 (Reuters) - Buyers emerged on Monday in U.S. stocks, enticed by the biggest proposed merger of the year, though crises in Japan, the Middle East and North Africa meant market volatility would continue.
The bulls have held the upper hand for three days, as the S&P 500 has put together its best three-day run since early December. Dow component AT&T rose 1.1 percent after the company announced plans to buy Deutsche Telekom's T-Mobile USA and refocused investor attention on attractive company valuations.
"The AT&T deal is just a piece of it. The other piece of it is there is a sense of some better news out of Japan and things haven't gotten any worse in Africa," said Gail Dudack, chief investment strategist at Dudack Research Group in New York.
The $39 billion AT&T deal would create the largest wireless phone operator in the United States.
While the outlook for Japan remains a worry, glimmers of hope about the nuclear crisis and investor Warren Buffett's comments about Japanese stocks also helped investor sentiment on Monday.
The iShares MSCI Japan Index Fund was up 2.7 percent.
The market volatility index fell 16.2 percent, its biggest daily percentage drop since May, and was trading below its 14- and 200-day moving averages for the first time since the earthquake in Japan.
Dudack said of Japan and the turmoil in the oil-producing region that "neither situation is resolved, so it's hard to know what the effects are. The market has been really volatile and it will continue to be really volatile.".
The Dow Jones industrial average gained 178.01 points, or 1.50 percent, to 12,036.53. The Standard & Poor's 500 Index climbed 19.18 points, or 1.50 percent, to 1,298.38. The Nasdaq Composite Index added 48.42 points, or 1.83 percent, to 2,692.09.
AT&T shares were upgraded by at least four brokerages, rising 1.1 percent to $28.26. In the European market, Deutsche Telecom rose 11.3 percent.
Shares of Verizon, which has a joint venture with with Vodafone, gained 1.7 percent to $36.46, while Sprint Nextel Corp shares plummeted 13.5 percent to $4.37. Leap Wireless International Inc shot up 15.7 percent to $14.05 and MetroPCS Communications gained 4.8 percent to $15.64.
Stocks posted losses last week as nuclear worries escalated in the aftermath of Japan's earthquake and tsunami.
Investors also grappled with turmoil in Libya, as forces loyal to Muammar Gaddafi surrounded Misrata, the only big rebel stronghold in western Libya.
With Monday's move stocks recovered half of the losses from the recent drop, but met resistance at the 14-day moving average near 1,300. A climb through that level would set the next resistance point at 1,307.77, the 61.8 percent retracement of the 2011 high-to-low decline.
The Nasdaq briefly rose more than 2 percent, helped by gains in semiconductor shares. The PHLX semiconductor index was up 1.8 percent. The index fell about 9 percent over the last two weeks.
AT&T Inc's offer for Deutsche Telekom AG's T-Mobile USA, sparked a rally in European telecom shares.
In Japan, power cables were connected to nuclear reactors at a power plant damaged by an earthquake and tsunami. The World Health Organization said radiation found in food from the area was a "serious situation."
Volume was modest with about 7.66 billion shares traded on the New York Stock Exchange, the American Stock Exchange and Nasdaq, slightly below the daily average of 8.12 billion.
Advancing stocks outnumbered declining ones on the NYSE by 2,458 to 546, while on the Nasdaq, advancers beat decliners 2,048 to 574. (Reporting by Chuck Mikolajczak; Editing by Kenneth Barry)