* Merkel comments ease investor concerns over Greece
* Trading expected to be volatile
* Housing, production data point to recovering U.S. economy
* Finance arm to resume paying dividend to GE
* Indexes up: Dow 0.5 pct, S&P 0.6 pct, Nasdaq 0.3 pct
By Rodrigo Campos
NEW YORK, May 16 (Reuters) - U.S. stocks rose on Wednesday following three days of declines on the S&P 500, with upbeat U.S. data supporting the market after German Chancellor Angela Merkel temporarily soothed investor worries about Greece leaving the euro zone.
Strong housing and industrial data kept bids on the market alive, but traders cautioned the session is likely to be volatile, tracking developments in Europe.
General Electric Co's finance arms won regulatory approval to resume returning some of its profit to the parent company, a move that could clear the way for GE to accelerate stock buybacks and raise its shareholder dividend. GE Capital plans to pay a special $4.5 billion dividend to GE, the biggest U.S. conglomerate, later this year.
GE shares rose 3.2 percent to $18.99.
Industrial shares were among top gainers after data showed production rose in April at its fastest pace in over a year while a rebound in groundbreaking for U.S. homes in April suggested the housing market recovery was gaining some traction.
"We had some pretty good numbers in the US this morning," said Paul Zemsky, New York-based head of asset allocation at ING Investment Management. "The U.S. is continuing to muddle through although there is all sort of turmoil in Europe."
Equity futures bounced back from steep overnight losses hit as investors worried about Greece's political and financial crisis. Merkel's comments at a joint press conference with French President Francois Hollande were seen partly alleviating those fears.
Opinion polls show leftists opposed to the terms of the bailout that is keeping Greece afloat would likely win the new election, set for June 17. Greeks, afraid of the devaluation that would follow an exit from the euro, withdrew at least 700 million euros from their banks on Monday.
"Greece is trying to posture to get some concessions and Germany is trying to limit those to the bare minimum," ING's Zemsky said. "It's a question of who's going to blink and until there is more certainty the markets will be under pressure."
The Dow Jones industrial average gained 62.55 points, or 0.50 percent, to 12,694.55. The S&P 500 Index rose 7.57 points, or 0.57 percent, to 1,338.23. The Nasdaq Composite added 9.07 points, or 0.31 percent, to 2,902.83.
The minutes from the Federal Reserve's April meeting, due at 2 p.m. (1800 GMT), will be scrutinized for any discussion on the health of the labor market as investors debate the likelihood of more stimulus measures.
The Fed meeting took place before the first Greek election, so they will not likely include clues on how the Fed is going to respond if the European crisis deepens, said Paul Mendelsohn, chief investment strategist at Windham Financial Services in Charlotte, Vermont.
J.C. Penney shares tumbled 13 percent a day after the department store owner scrapped its dividend and showed its effort to remake itself as an affordable fashion-oriented retail chain took a much bigger-than-expected toll on sales in the first quarter.
Target Corp posted a higher profit and raised its expectations for the year, and its shares rose 1.6 percent.
Facebook Inc increased the size of its initial public offering by 25 percent and could raise as much as $16 billion as strong investor demand for the No. 1 social network trumps debate about the company's long-term potential to make money.