* US-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 1.22 pct, S&P 0.75 pct, Nasdaq 0.57 pct (Updates to early afternoon)
By Medha Singh
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 touching a session high of more than two months and the small-cap Russell 2000 hitting a record high for the fourth straight session.
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.
"I suspect that we'll continue to trend higher sans some major disappointing news," said Gordon Charlop, managing director at Rosenblatt Securities in New York.
"This is an indication of what we'll see near term, because we are through earnings, relatively light on macro data, and with geopolitics, it seems like some of the emotion has been reduced between now and the Korean summit."
The S&P industrial sector advanced 0.8 percent. Boeing, which sells about a fourth of its commercial aircraft to Chinese customers, jumped 3.4 percent, the biggest percentage gainer on the Dow and lifting the blue-chip index higher.
At 12:41 a.m. EDT the Dow Jones Industrial Average was up 301.93 points, or 1.22 percent, at 25,017.02, the S&P 500 was up 20.44 points, or 0.75 percent, at 2,733.41 and the Nasdaq Composite was up 41.91 points, or 0.57 percent, at 7,396.25.
General Electric advanced 2.6 percent on an $11.1 billion deal to merge its transportation business with rail equipment maker Wabtec, which jumped about 4.2 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 3.9 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 0.9 percent. The technology sector rose 0.8 percent.
Tesla jumped 2.9 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 13.3 percent after agreeing to be bought for $4.87 billion by Fifth Third Bancorp, which fell 7.8 percent, the biggest percentage decliner on the S&P.
On the downside, Celgene fell 3.6 percent and hit a four-year low, dragging on the Nasdaq Biotech index 0.8 percent lower.
Advancing issues outnumbered decliners by a 2.67-to-1 ratio on the NYSE. Advancing issues outnumbered decliners by a 1.64-to-1 ratio on the Nasdaq.
The S&P index recorded 32 new 52-week highs and 3 new lows, while the Nasdaq recorded 149 new highs and 26 new lows. (Reporting by Medha Singh in Bengaluru; Editing by Sriraj Kalluvila)