* U.S.-China trade war spat 'on hold' -Treasury's Mnuchin
* Boeing, Caterpillar drive industrials higher
* M&A deals worth $27.6 bln also add to optimism
* GE up on $11 bln deal to merge transport unit with Wabtec
* Indexes gain: Dow 1.2 pct, S&P 0.7 pct, Nasdaq 0.4 pct (Updates to late afternoon)
By Caroline Valetkevitch
May 21 (Reuters) - U.S. stocks rallied on Monday after the United States and China put their trade differences "on hold" to work on a wider agreement, while sentiment was also boosted by the nearly $28 billion worth of merger deals.
The truce sparked a broad rally, with the Dow Jones Industrial Average up more than one percent. The small-cap Russell 2000 hit a record high for the fourth straight session, though it was underperforming large caps.
U.S. Treasury Secretary Steven Mnuchin said on Sunday the United States and China had agreed to drop their tariff threats, while China on Monday praised a significant dialing back of tensions.
"The big news over the weekend was that a trade war has been averted, and so we had an adjustment in there, covering bets that there would be negative news coming out of the discussion," said Bucky Hellwig, senior vice president at BB&T Wealth Management in Birmingham, Alabama.
The S&P industrial sector advanced 1.7 percent. Boeing, which sells about a fourth of its commercial aircraft to Chinese customers, jumped 3.5 percent, the biggest percentage gainer on the Dow and lifting the blue-chip index higher.
At 3:18 p.m. EDT, the Dow Jones Industrial Average rose 295.18 points, or 1.19 percent, to 25,010.27, the S&P 500 gained 18.93 points, or 0.70 percent, to 2,731.9 and the Nasdaq Composite added 29.21 points, or 0.4 percent, to 7,383.54.
General Electric advanced 2.7 percent on an $11.1 billion deal to merge its transportation business with rail equipment maker Wabtec, which jumped about 3.9 percent.
Still, not all U.S. business leaders were happy with the trade war truce, with some cautioning that Washington would find it tough to rebuild momentum to address what they see as troubling Chinese policies.
AK Steel and U.S. Steel both fell more than 4 percent following a delay in implementing tariffs on Chinese imports.
Micron rose 3.7 percent, the most on the S&P, after the chipmaker lifted its current-quarter forecast.
The easing of the trade dispute also boosted the chipmakers, whose major clients include Chinese firms, with the Philadelphia chip index gaining 0.7 percent. The technology sector rose 0.7 percent.
Tesla jumped 2.4 percent on pricing of Model 3's fully-loaded version and after brokerage Berenberg raised its already bullish price target.
Regional lender MB Financial jumped 12.6 percent after agreeing to be bought for $4.87 billion by Fifth Third Bancorp, which fell 8.1 percent, the biggest percentage decliner on the S&P.
On the downside, Celgene fell 38.1 percent and hit a four-year low, dragging on the Nasdaq Biotech index 1.5 percent lower.
Advancing issues outnumbered declining ones on the NYSE by a 2.41-to-1 ratio; on Nasdaq, a 1.50-to-1 ratio favored advancers.
The S&P 500 posted 33 new 52-week highs and 3 new lows; the Nasdaq Composite recorded 162 new highs and 31 new lows. (Additional reporting by Medha Singh in Bengaluru; Editing by Sriraj Kalluvila and Chizu Nomiyama)