* Deal to extend tax cuts boosts futures
* Oil futures rise to 2-year high, Chevron gains
* Ireland expected to pass austerity budget
* Futures up: S&P 11.9 pts, Dow 82 pts, Nasdaq 23.75 pts (Recasts, adds details)
By Leah Schnurr
NEW YORK, Dec 7 (Reuters) - Wall Street was set to rise strongly on Tuesday as investors bet that a deal to extend tax breaks will prompt increased spending and buoy the economy.
U.S. President Barack Obama announced the deal to renew Bush-era tax cuts for wealthier Americans -- as Republicans had wanted -- as well as the middle class. The deal was expected to extend breaks on dividends and capital gains.
Investors have said the tax cuts were necessary to keep the fragile economic recovery on track as the cuts could lead to more spending and investing. Keeping the capital gains tax steady could make investors less inclined to sell shares. The Financial Select Sector SPDR exchange-traded fund rose 1.1 percent.
"From a psychological standpoint, this probably will continue to boost the markets in the sense that this most likely will lead to an expansion in economic activity," said Peter Cardillo, chief market economist at Avalon Partners in New York.
"People are going to be feeling a little bit better, and that means they'll be maybe even spending a little bit more."
S&P 500 futures rose 11.9 points and were above fair value, a formula that evaluates pricing by taking into account interest rates, dividends and time to expiration on the contract. Dow Jones industrial average futures gained 82 points, and Nasdaq 100 futures added 23.75 points.
Commodities were up, with oil futures climbing above $90 a barrel for the first time in 26 months. Chevron Corp was up 1.1 percent at $85.85 before the opening bell.
Futures shrugged off disappointment there was no further action out of the euro zone to deal with its debt crisis. After a five-hour meeting Monday, ministers said they would not introduce any measures to tackle the threat of contagion.
But in a positive sign, Ireland was expected to pass a record austerity budget through parliament, averting the risk of a snap election that could have plunged the country into a deeper crisis.
China is likely to raise interest rates in the coming days in a demonstration of the government's resolve to tame inflation, an official newspaper reported.
Investors are looking to China to help drive global economic growth, and moves to rein in its economy have been negative for the market. However, Cardillo said the worries have already been priced in and shouldn't derail the rally.
The U.S. government sold its remaining shares in Citigroup Inc for $4.35 apiece, marking an exit from ownership in the bailed-out bank, with a $12 billion gross profit for taxpayers. Its shares rose 2.9 percent to $4.58 after earlier trading lower.
Talbots Inc sank nearly 24 percent to $8.68 in early electronic trading after the retailer cut its full-year forecast.
Stocks ended flat Monday as worries about Europe's situation frustrated investors. Analysts still see the S&P 500 breaking out of its recent range soon and surpassing an intraday high for the year just above 1,227 reached on Nov. 5. The S&P closed at 1,223.12 on Monday.