* Deutsche Bank nears $5.4 bln settlement with DOJ - AFP
* S&P financials set for best day in two months
* Banks bolster S&P, Goldman drives Dow
* Indexes up: Dow 1.1 pct, S&P 1.01 pct, Nasdaq 0.99 pct (Updates to late afternoon)
By Lewis Krauskopf
Sept 30 (Reuters) - Wall Street rallied on Friday, lifted by a surge in Deutsche Bank shares and financial stocks after concerns eased about the health of the German bank.
The S&P financial sector gained 1.8 percent, putting it on track for its best day in about two months.
Deutsche Bank's U.S.-listed shares jumped 15.2 percent, a day after sinking to a record low.
French news agency AFP reported that Deutsche Bank was nearing a $5.4 billion settlement with U.S. officials over charges related to selling toxic mortgage bonds. Germany's largest bank has been engulfed by crisis after earlier this month being handed a demand for up to $14 billion by the Department of Justice.
U.S. stocks had sold off sharply on Thursday, after Bloomberg reported that some hedge funds had withdrawn excess cash and positions held at the German lender.
As investors assessed Deutsche Bank situation, "they realized that it's maybe an overreaction to yesterday's selloff and the concerns that they had comparing it to Lehman Brothers," said Alan Lancz, president of investment advisory firm Alan B. Lancz & Associates in Toledo, Ohio.
The Dow Jones industrial average rose 199.46 points, or 1.1 percent, to 18,342.91, the S&P 500 gained 21.71 points, or 1.01 percent, to 2,172.84 and the Nasdaq Composite added 52.43 points, or 0.99 percent, to 5,321.58.
Bank stocks boosted the S&P. Bank of America and Citigroup each climbed more than 3 percent and JPMorgan rose 1.9 percent.
Goldman Sachs' 2 percent increase gave the Dow its biggest boost.
Eight of the 11 major sectors were higher. Energy shares jumped 1.7 percent, with oil prices on track for big weekly gains.
With Friday's increases, the three major stock indexes were all on pace for their third straight week of gains. The benchmark S&P 500 is up about 6 percent for the year.
In other company news, Cognizant shares plunged 12.3 percent, making it the biggest loser among S&P 500 companies. The IT services provider said it was conducting an internal investigation into possible violations of U.S. anti-corrupt practices laws related to payments in India.
Advancing issues outnumbered declining ones on the NYSE by a 3.02-to-1 ratio; on Nasdaq, a 3.02-to-1 ratio favored advancers.
The S&P 500 posted 22 new 52-week highs and 3 new lows; the Nasdaq Composite recorded 68 new highs and 32 new lows. (Additional reporting by Yashaswini Swamynathan in Bengaluru; Editing by Anil D'Silva and Nick Zieminski)