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By Victoria Thieberger
MELBOURNE, Sept 29 (Reuters) - Australian shares rose 1.6 percent on Tuesday to their highest close in a year, led by resources firms and banks as a burst of merger activity in the United States boosted confidence in an economic recovery.
The U.S. deals had investors betting mergers would also pick up in Australia as the domestic economy staged a firm recovery.
Miner BHP Billiton Ltd
"There was money flowing into mining, energy and banking stocks today as expected, when you get a lift in confidence, but we also saw heavy buying in healthcare and consumer staples as well, and that really provided the market with a bit of a boost," said David Taylor, an analyst at CMC Markets.
The benchmark S&P/ASX index <.AXJO> jumped 75.7 points to 4,753.1, according to the latest available data, its highest close since Oct. 2, 2008.
Aussie stocks are on track to post their biggest quarterly gain in 22 years, according to CommSec.
New Zealand's benchmark NZX 50 index <.NZ50> rose 0.8 percent to 3,155.4.
"ZIG-ZAG RISE"
Low interest rates, government spending and a realisation that the market might have fallen too far were behind the renewed optimism, said Michael Heffernan, senior client advisor at Auststock Group.
He saw the market gaining further, but in a zig-zag fashion.
"We're up 1.7 percent today but we're not going to do this every day," Heffernan said.
BHP Billiton rose 2.4 percent to A$37.99 and rival Rio
Tinto
Among banks, Commonwealth rose 2.1 percent to A$52.10,
National Australia Bank
Optimism about the economy helped lift the discretionary
retail sector <.AXDJ> by 1.1 percent. Electricals and furniture
retailer Harvey Norman
Shares in Western Plains Resources
Western Plains shed 5.6 percent to A$0.25 after Australia's military reiterated its opposition to its plan to develop a magnetite project within a weapons-testing zone. [ID:nSYD482283]. (Reporting by Victoria Thieberger; editing by Jonathan Standing)