Financial stocks outperformed the overall markets Wednesday, with the sector lifted by a Federal Reserve official's comments that interest rates could stay flat until 2012.

The KBW Bank Index rose for the third straight day, closing up 1.36%, even as the broader markets were dragged down by some negative home construction data.

Peter Cardillo, chief market economist with Avalon Partners in New York, said banking stocks may have been aided by a projection by James Bullard, the president of the Federal Reserve Bank of St. Louis, that the Federal Open Market Committee might not raise interest rates until early 2012, if it acts the same way it did after the past two recessions.

"I guess those comments by Mr. Bullard were appealing" to investors in bank stocks, Cardillo said. "The financials were actually up. Basically, I think, they cushioned the whole market a little bit."

The broader markets were depressed by a disappointing Commerce Department report showing that construction of homes and apartments fell 10.6% in October to an annual rate of 529,000. Economists polled by Thomson Reuters expected an annual rate of 600,000.

Markets may have also been influenced by comments from President Obama, who told Fox News that he was worried that overspending could drive up the deficit, sapping confidence in the U.S. economy and creating a second recession.

The Dow Jones Industrial Average fell 0.11% and the Standard & Poor's 500 index fell 0.05%.

Shares in the largest banking companies, meanwhile, ended the day on a high note.

Bank of America Corp. rose 3.68%; JPMorgan Chase & Co. 0.51%; Wells Fargo & Co. 1.73% and Citigroup Inc. up a nickel, to $4.29.

Most regional bank shares were up too, although a few notable players ended the day slightly down.

Decliners included Bank of New York Mellon Corp., which fell 0.63%, and U.S. Bancorp down 0.13%.

Gainers included PNC Financial Services Group Inc. up 1.21%; SunTrust Banks Inc. 0.37%; BB&T Corp. 0.72%; and Fifth Third Bancorp., 2.63%.

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