Updates to mid-afternoon trading

By Stephen Culp and Avinash P

NEW YORK, July 14 (Reuters) - The S&P 500 and the Nasdaq advanced on Tuesday as solid big bank results and a cooler-than-expected inflation report boosted risk appetite amid rising Middle East tensions.

A rebound in chip shares .SOX put the Nasdaq out front, while softness in defensive stocks dragged the Dow slightly lower.

The Labor Department's closely watched Consumer Price Index showed inflation cooled more than analysts expected in June, largely due to abating energy price pressures amid last month's signs of progress in U.S.-Iran peace negotiations.

U.S. Federal Reserve Chair Kevin Warsh sat for his first congressional testimony since his confirmation, in part to lay out the central bank's plan to contain upward price pressures. Warsh's testimony occurred while the battle for control over the Strait of Hormuz has led to ramped-up airstrikes between the United States and Iran and boosted crude oil prices, reviving fears of upward price pressures.

Still, following the CPI report, financial markets are pricing in an 83.4% likelihood that the Fed will let its key interest rate stand at the conclusion of its July policy meeting, up from 58.3% on Monday. Markets expect at least one 25-basis-point rate hike before year-end, according to CME's FedWatch tool.

"(The Fed) has been successful on the employment part of its dual mandate," said Tom Hainlin, national investment strategist at U.S. Bank Asset Management in Minneapolis. "Warsh has been very clear that if they do a self-analysis, the Fed will hit its inflation target, and now the question going forward is what policies are they going to enact to get there?"

EARNINGS SEASON KICKS OFF

Second-quarter earnings season began with five big U.S. banks reporting solid results, buoyed by trading strength and dealmaking.

Goldman Sachs GS.N surged 7.9% after it surpassed second-quarter profit expectations, as dealmaking picked up pace and geopolitical uncertainties boosted its trading business. JPMorgan Chase JPM.N and Bank of America BAC.N advanced 1.2% and 1%, respectively, after delivering consensus-beating profits.

Citigroup C.N slid 5.7% as worries over expenses overshadowed its profit beat, while Wells Fargo WFC.N dropped 3.5%.

"It's a big earnings week, so we finally get to hear from corporate America," Hainlin said. "What we continue to look for from the banks is what are they seeing in terms of consumer health? So far, good news on that front."

IBM IBM.N shares tumbled 25.1% after the company warned second-quarter revenue would fall below estimates. The move put Big Blue's stock on track for a bigger one-day percentage plunge than it suffered in the 1987 "Black Monday" crash.

The Dow Jones Industrial Average .DJI fell 27.72 points, or 0.05%, to 52,470.92, the S&P 500 .SPX gained 34.58 points, or 0.46%, to 7,549.69 and the Nasdaq Composite .IXIC gained 277.89 points, or 1.07%, to 26,151.07.

Among the 11 major sectors of the S&P 500, tech shares .SPLRCT registered the biggest percentage gain, while healthcare stocks .SPXHC were the biggest laggards.

Advancing issues outnumbered decliners by a 1.82-to-1 ratio on the NYSE. There were 167 new highs and 81 new lows on the NYSE.

On the Nasdaq, 2,782 stocks rose and 1,898 fell as advancing issues outnumbered decliners by a 1.47-to-1 ratio.