CORRECTED-US STOCKS-S&P 500 pares losses as U.S. stimulus passage expected

(Corrects paragraph 11 to reflect CBOE Volatility Index on track for biggest one-day gain since Oct. 28, not Nov. 5.)

* Big banks jump after Fed's stress test results

* U.S. Congress set to vote on $900 bln relief bill

* Tesla slips from record high in its S&P 500 debut

* Dow up 0.2%, S&P down 0.37%, Nasdaq off 0.16%

By Stephen Culp

NEW YORK, Dec 21 (Reuters) - The S&P 500 lost ground on Monday, but was well off its session lows as investors grappled with the outbreak of an ominous new strain of COVID-19 along with the likely passage of a long-awaited stimulus package.

The Nasdaq joined the S&P 500 in the red, but financials helped the blue-chip Dow reverse course for a modest gain.

"While there's talk of the sell-off being related to the new COVID strain, my sense is air's being let out of the balloon," said Oliver Pursche, president of Bronson Meadows Capital Management in Fairfield, Connecticut. "We got ahead of ourselves in terms of market performance and we still have significant economic headwinds."

Congress hammered out a pandemic relief agreement on Sunday after months of partisan wrangling. The $900 billion package, expected to pass on Monday, includes unemployment aid and steers money to small businesses, airlines, transit systems and vaccine distribution. week it was pretty clear we were going to get something, but (the stimulus package) is on the low end of what people were hoping for," Pursche said.

But the emergence of new, highly infectious strain of COVID-19 in Britain has raised fears of additional shutdowns, and prompted countries around the world to shut their doors to travelers from the United Kingdom. news sent airline stocks sliding, even with the prospect of $15 billion in payroll assistance for commercial carriers included in the stimulus deal. The S&P 1500 Airline index .SPCOMAIR was down 1.2%. Inc TSLA.O became the most valuable company ever added to the S&P 500 and will account for about 1.69% of the index. The electric car maker's stock dropped 4.6%. bucked the trend. The U.S. Federal Reserve released the results of its semiannual stress test late Friday and announced relaxed restrictions on buybacks and dividends. The S&P Banking index .SPXBK jumped 3.0%. Sachs Group GS.N surged 7.4%, surpassing its pre-COVID share price.

The CBOE Volatility Index .VIX, a gauge of investor anxiety, jumped to its highest level since early November and was also on course for its biggest one-day point jump since Oct. 28.

The Dow Jones Industrial Average .DJI rose 59.24 points, or 0.2%, to 30,238.29, the S&P 500 .SPX lost 13.55 points, or 0.37%, to 3,695.86 and the Nasdaq Composite .IXIC dropped 20.26 points, or 0.16%, to 12,735.38.

Of the 11 major sectors in the S&P 500, financials .SPSY and tech .SPLRCT were the only percentage gainers.

Nike Inc (NYSE: NKE ) NKE.N rose 4.7% after the athletic apparel maker boosted its full-year revenue forecast, prompting multiple brokers to raise their price targets. Martin Corp LMT.N lost 1.1% after announcing it would buy U.S. rocket engine maker Aerojet Rocketdyne Holdings Inc AJRD.N for $4.4 billion. Business Machines Corp IBM (NYSE: IBM ).N shed 2.2% after saying it would acquire Finland-based startup Nordcloud, in its latest effort to bolster its cloud-computing business. issues outnumbered advancing ones on the NYSE by a 2.06-to-1 ratio; on Nasdaq, a 1.41-to-1 ratio favored decliners.

The S&P 500 posted 12 new 52-week highs and no new lows; the Nasdaq Composite recorded 153 new highs and 16 new lows.