RPT-US STOCKS-Wall St rallies, financials jump on Fed's rate cut

(Repeats to widen distribution)

* Fed's rate cut drives stocks higher

* Goldman's smaller-than-feared loss boosts financials

* Best Buy earnings help lift tech sector

* Nasdaq, S&P up over 5 pct, Dow up 4.2 pct

* For up-to-the-minute market news, please click on [STXNEWS/US] (Adds new paragraph 7 with context on Dow's gain, updates with home builders' shares rallying in new paragraph 11)

By Chuck Mikolajczak

NEW YORK, Dec 16 (Reuters) - U.S. stocks rallied on Tuesday after the Federal Reserve rewrote its playbook by slashing borrowing costs to a record low, even zero, and pledging more unconventional steps to fight the deepest recession in generations.

Banks led the charge higher, spurred both by the Fed's move to cap its target lending rate at a quarter percentage point and by a quarterly loss from Wall Street icon Goldman Sachs (GS.N) that was not as gruesome as many feared. Goldman's stock gained more than 14 percent, outshining an 11 percent advance in the S&P 500's financial index .GSPF.

Stocks were up modestly all day on optimism that the Fed, at its last meeting of 2008, might take dramatic measures to combat the credit crisis and global economic slowdown. But the rally caught fire right after the central bank released its statement in mid-afternoon, pushing the benchmark Standard & Poor's 500 index to its highest closing level since Nov. 10 and driving each of the major U.S. stock indexes to their best one-day performance for the month.

"The rate cut was definitely more than a lot of people were expecting and that's really helping the market here. But the big takeaway here is Bernanke's going back out into the market and trying to loosen things up in credit," said Jocelynn Drake, market analyst at Schaeffer's Investment Research in Cincinnati, Ohio.

"We've got a Fed that's willing to really go the distance for the market right now."

The Dow Jones industrial average .DJI rose 359.61 points, or 4.20 percent, to 8,924.14. The Standard & Poor's 500 Index .SPX jumped 44.61 points, or 5.14 percent, to 913.18. The Nasdaq Composite Index .IXIC climbed 81.55 points, or 5.41 percent, to 1,589.89.

Tuesday's advance marked the largest point and percentage gain for the Dow since Nov. 24 and pushed the blue-chip Dow average up 1.1 percent for the month to date.

BANKS AND BUILDERS LOVE THE FED

In a unanimous vote, the Fed made a larger-than-expected cut to the benchmark federal funds rate by at least three-quarters of a percentage point to a target range of zero to 0.25 percent from its current 1 percent.

The U.S central bank said that it will employ all available tools to promote the resumption of growth and preserve price stability. For details, see [nTRT000354]

Shares of Goldman Sachs (GS.N) surged after the company reported its first quarterly loss since going public in 1999, but its results were not as dire as some had anticipated. For details, see [ID:nN16521076]

JPMorgan Chase & Co (JPM.N) was the Dow's top performer, up 13 percent at $32.35, while Goldman Sachs' stock jumped 14.4 percent to $76 on the New York Stock Exchange.

Home builders' shares also jumped following the Fed's huge rate cut, which investors believe will help stimulate lending and home buying. The Dow Jones U.S. Home Construction Index .DJUSHB soared 11.2 percent.

The stock of luxury home builder Toll Brothers (TOL.N)leaped 9.2 percent to $22.22, while shares of D.R. Horton Inc (DHI.N), the largest U.S. home builder, gained 11 percent to $7.79.

BEST BUY GIVES TECH A GOOD DAY

Investor sentiment also improved after better-than-expected quarterly earnings from electronics retailer Best Buy (BBY.N), which buoyed technology stocks. Companies such as Microsoft Corp (MSFT.O) and Intel (INTC.O), which draw significant revenues from consumer demand for electronic products, were among the Nasdaq's top advancers.

Best Buy's stock jumped almost 18 percent to $27.68 after its quarterly earnings beat estimates and the company revealed plans to offer employee buyouts and reduce store openings in an effort to combat reduced consumer spending. [ID:nN16548984]

Microsoft advanced 5.6 percent to $20.11, while Intel gained 7.2 percent to $15.64.

Shares of General Electric (GE.N) rose 5.7 percent to $17.92 after the U.S conglomerate issued guidance for the rest of 2008, but said that it will no longer be providing specific quarterly earnings-per-share guidance going forward. [ID:nN16451777]

Economic data earlier in the session continued to show effects of the recession, with U.S. consumer prices plunging at a record rate for a second straight month in November and housing starts tumbling to a record low. [ID:nN1620608].

Volume was low on the New York Stock Exchange, with about 1.54 billion shares changing hands, below last year's estimated daily average of roughly 1.90 billion. On Nasdaq, about 2.27 billion shares traded, above last year's daily average of 2.17 billion.

Advancing stocks outnumbered declining ones on the NYSE by a ratio of almost 6 to 1, while on the Nasdaq, seven stocks rose for every two that fell. (Additional reporting by Leah Schnurr; Editing by Jan Paschal)