NEW YORK ( TheStreet) -- Financial stocks rallied Tuesday on positive economic data. The Financial Select Sector SPDR ( XLF), a widely-followed exchange traded fund that tracks financial services stocks was up 20 cents, to $14.23.

The biggest winner this afternoon was M&T Bank ( MTB). The regional bank's stock was up $4.14, to $89.59, on rumors that it was in merger discussions with Banco Santander ( BSBR).

Meanwhile, Citigroup's ( C) stock was up four cents to $3.90 after a judge said she wasn't ready to approve Citi's $75 million settlement with the SEC for allegedly failing to disclose $40 billion in subprime-related holdings to shareholders.

The PMI Group's ( PMI) shares were up 16%, to $3.01, after John Paulson disclosed that he added a stake in the company.

Losers of the day include Fannie Mae ( FNMA) and Freddie Mac ( FMCC). Fannie Mae was down 1.7%, to 36 cents a share, while Freddie Mac was down 2.13%, to 39 cents a share, as the debate raged over the future of the government's role in housing markets.

It was also a bad day for Hallmark Financial ( HALL). Shares were down 59 cents, to $8.89, after a research note said that underwriting results were responsible for an operating loss for the insurer last quarter.

-- Written by Maria Woehr in New York.