(Agencies)
Updated: 2008-03-19 07:24

NEW YORK - US stocks surged on Tuesday as investors overcame initial disappointment that the Federal Reserve cut its benchmark interest rate less than expected and focused on the likelihood of future cuts, driving the S&P 500 to its biggest percentage gain in more than five years.

Pumps draw petroleum from oil wells in Signal Hill, California. Oil prices shot higher on Tuesday after the Federal Reserve slashed three-quarters of a point off interest rates, fueling expectations of stronger energy demand from the world's biggest economy. [Agencies]

Oil prices surged 3 percent, while the dollar reversed earlier losses and strengthened against the euro. And US gold futures turned lower after the Fed slashed its target interest rate by three-quarters of a percentage point to to 2.25 percent.

The S&P 500 had its best daily percentage gain since October 2002, rising more than 4 percent. The technology-rich Nasdaq also jumped more than 4 percent for its biggest percentage gain since October 2003, while the Dow industrials jumped more than 400 points.

Earlier, European benchmark indexes gained more than 3 percent.

Investors had expected a cut of a full percentage point but analysts said the Fed's recent actions showed it was prepared to do what it takes -- such as its intermediation in the sale of investment firm Bear Stearns on Sunday -- to get its hands around a simmering global credit crisis.

Better-than-expected earnings from Wall Street banks Goldman Sachs and Lehman Brothers also provided relief to the battered financial sector on both sides of the Atlantic.

"The Fed has shown that they are focused on getting the economy back on its feet first and foremost, and they will worry about inflation later," said K. Daniel Libby, senior portfolio manager at Sands Brothers Select Access Fund in Greenwich, Connecticut.

US stocks jumped to session highs after the Fed announced its decision, and US short maturity Treasury debt prices extended losses.

Market expectations of a Fed rate cut had deepened after JPMorgan Chase on Sunday agreed to purchase stricken rival Bear Stearns for the fire-sale price of $2 a share.

"The economy will likely recover later this year based on what the Fed is doing. The market is rallying today. It got so oversold that I won't be surprised to see it rally further," said Chip Hanlon, president of Delta Global Advisors Inc in Huntington Beach, California.

"There's been tremendous panic. People throwing the baby out with the bath water, preparing for a Category 5 hurricane, and that presents a buying opportunity," Hanlon said.

The Dow Jones industrial average was up 420.41 points, or 3.51 percent, at 12,392.66. The Standard & Poor's 500 Index was up 54.14 points, or 4.24 percent, at 1,330.74. The Nasdaq Composite Index was up 91.25 points, or 4.19 percent, at 2,268.26.

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