* AT&T to buy T-Mobile USA from Deutsche Telekom
* Buffett: Japan quake is "buying opportunity" in stocks
* Stocks up: Dow 1.5 pct, S&P 1.4 pct, Nasdaq 1.7 pct (Updates to early afternoon)
By Caroline Valetkevitch
NEW YORK, March 21 (Reuters) - U.S. stocks rose on Monday after AT&T said it would buy wireless rival T-Mobile, sparking expectations of more deal activity, even as Japan's outlook was expected to keep market uncertainty high for weeks.
The $39 billion AT&T deal would create the largest wireless phone operator in the United States.
AT&T shares were up 1.5 percent to $28.34. In the European market, Deutsche Telecom, which owns T-Mobile USA, rose 11.3 percent.
Shares of Verizon, which has a joint venture with with Vodafone, gained 2.2 percent to $36.63, while Sprint Nextel Corp shares plummeted 15.8 percent to $4.25. Leap Wireless International Inc shot up 12.3 percent to $13.63 and MetroPCS Communications gained 4.8 percent to $15.64.
"Any sort of M&A activity has a beneficial impact on the market as a whole because it gives the impression corporate insiders see value in the market," said Thomas Villalta, portfolio manager for Jones Villalta Asset Management in Austin, Texas, which has a small holding in telecom services.
While the outlook for Japan remains a worry, glimmers of hope about the nuclear crisis and investor Warren Buffett's comments about Japanese stocks' being a buying opportunity helped investor sentimemt on Monday.
The market volatility index fell 15.8 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. The iShares MSCI Japan Index Fund was up 1.8 percent.
Stocks posted losses last week as nuclear worries escalated in the wake of Japan's earthquake and tsunami.
"Given the size of Japan, given their heft within the market from a trading partner standpoint for so many companies, that could possibly be a drag going into April," Villalta said.
The Dow Jones industrial average was up 172.25 points, or 1.45 percent, at 12,030.77. The Standard & Poor's 500 Index was up 17.68 points, or 1.38 percent, at 1,296.88. The Nasdaq Composite Index was up 43.53 points, or 1.65 percent, at 2,687.20.
The Nasdaq briefly rose more than 2 percent, helped by gains in semiconductor shares. An index of semiconductors was up 1.6 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 have been connected to all six nuclear reactors at a power plant damaged by an earthquake and tsunami. The World Health Organization said radiation found in food from the area near the damaged nuclear plant was a "serious situation."
Investors kept a careful eye on events in Libya where Western powers launched a second wave of air strikes early Monday against the forces of Muammar Gaddafi.
Libya and unrest in the Middle East pushed oil prices nearly 1 percent higher. Brent crude futures rose to $114.77 a barrel. (Reporting by Caroline Valetkevitch, additional reporting by Rodrigo Campos; Editing by Kenneth Barry)