Confidence among U.S. homebuilders sank in March in data reported on Monday, while shares of subprime lender Accredited Home Lenders Holding Co. (LEND.O) plunged 12 percent for the day after the company said it was in talks about possible financing.

Falling house prices in the past year and rising defaults in the U.S. subprime mortgage market have unnerved financial markets in recent weeks, prompting concern that economic growth may be slowing.

Yet, U.S. stocks rallied on Monday, helped by a burst of merger deals and suggesting investors believe the fallout in the subprime mortgage market can be contained.

The Standard & Poor's 500 Index (.SPX) was up 1.1 percent and the Dow Jones industrial average (.DJI) nearly 1 percent in mid-afternoon trade.

Russell Read, chief investment officer at CalPERS, the biggest U.S. pension, said U.S. financial markets are likely to experience some fallout from troubles in subprime mortgage lending and there is likely be some contagion to the economy.

But fallout to financial markets is likely to be limited, said Read of CalPERS, who helps oversee about $232 billion for California state workers.

Reported by Reuters.