US STOCKS-M&A activity lifts markets as Q3 nears close

* Xerox will acquire ACS for about $6.4 billion

* Abbott to buy Solvay's drugs unit for $6.6 billion

* DJIA headed for best quarter since 1998

* Dow up 1.4 pct, S&P up 1.7 pct, Nasdaq up 2.2 pct (Updates to early afternoon)

NEW YORK, Sept 28 - U.S. stocks surged on Monday, as several merger deals bolstered investor confidence following three straight days of losses.

An increase in mergers and acquisitions is typically viewed as bullish, as it suggests companies are more optimistic about the economy and see values in the market.

"This is a very good sign," said Peter Kenny, managing director at Knight Equity Markets in Jersey City, New Jersey. "This is a very clear indicator that growth is anticipated in the market."

A number of companies announced large deals. Xerox agreed to buy Affiliated Computer Services Inc for $6.4 billion, while Abbott Laboratories said it would pay $6.6 billion for Solvay's drug unit.

Abbott shares climbed 3 percent to $48.75 while Affiliated Computer's stock advanced 12.2 percent to $53.00. In contrast, shares of Xerox sank 18 percent to $7.36.

With Monday's gains, the Dow Jones industrial average is up about 16 percent in the quarter so far, which would make it the index's best such period since the fourth quarter of 1998.

The Xerox deal comes a week after another large buyout in the tech sector, when Dell agreed to buy Perot Systems for about $3.9 billion.

"The tech sector is going to be one of the first beneficiaries of an economic rebound," Kenny said. "The fact that these deals are in the tech sector is a further piece of the recovery puzzle."

The Dow Jones industrial average gained 137.78 points, or 1.43 percent, to 9,802.97. The Standard & Poor's 500 Index rose 18.03 points, or 1.73 percent, to 1,062.41. The Nasdaq Composite Index climbed 45.21 points, or 2.16 percent, to 2,136.13.

The Jewish holiday of Yom Kippur observed on Monday and the end of the third quarter two days later could translate into thin volume and volatility as fund managers reposition their assets amid fewer market participants, investors said.

Dutch biotech firm Crucell said Johnson & Johnson bought 14.6 million new Crucell shares for over $400 million as part of a flu vaccine development deal.

Crucell shares fell 6.1 percent to $22.25 on the Nasdaq.

But blue-chip J&J's stock was up 1.3 percent at $61.43 on the New York Stock Exchange.

Dow Chemical advanced 3.7 percent to $26.07 after it said the Federal Trade Commission had cleared the way for its $1.68 billion sale of Morton Salt to Germany's K+S AG to go ahead.

Apple shares gained 2.1 percent to $186.19 on Nasdaq after China Unicom said it would sell Apple's iPhone in China, starting in October. France Telecom's Orange also said it would sell the product later this year.

The Federal Reserve Bank of Chicago said its National Activity Index was minus 0.9 in August, but its three-month moving average of economic indicators improved for the seventh straight month, rising to its highest level since June 2008.