Rate cut hopes fuel Wall Street as Dow up 331 points

By Ellis Mnyandu

NEW YORK (Reuters) - The Dow Jones industrial average notched its biggest percentage gain in four and a half years on Wednesday, after comments by the vice chairman of the Federal Reserve raised expectations for an interest rate cut in December.

And a sharp drop in oil prices for a second day eased worries that high energy costs might squeeze consumers going into the holiday season. The Dow and the S&P 500 jumped more than 2 percent, and the Nasdaq surged more than 3 percent.

Banks, insurers and other financials led the rally after Fed Vice Chairman Donald Kohn said renewed financial market turmoil could slow the economy more abruptly than previously thought. He said policy-makers must be "flexible and pragmatic."

"The implication from Kohn's comments is that the Fed now recognizes that market conditions have changed over the last month ... and that the Fed will be approaching the December 11 meeting with an open mind and will do what is necessary to keep the economy stabilized," said Philip Orlando, senior portfolio manager at Federated Global Investment manager.

The Dow Jones industrial average was up 331.01 points, or 2.55 percent, at 13,289.45. The Standard & Poor's 500 Index was up 40.79 points, or 2.86 percent, at 1,469.02. The Nasdaq Composite Index was up 82.11 points, or 3.18 percent, at 2,662.91.

The Fed's next policy-setting meeting is scheduled for December 11.

CITI JUMPS, OIL WORRY EBBS

Shares of Citigroup Inc, which helped kick off the rebound on Tuesday after getting a capital injection from the Gulf Arab emirate of Abu Dhabi, were the second biggest contributor to the S&P's advance. Shares of insurer American International Group Inc led financial stocks on the Dow.

The S&P financial index rose 5.04 percent, the biggest one-day advance since October 2002.

In addition to expectations of a rate cut, a drop of more than $3 in crude oil prices bolstered shares of consumer-oriented companies such as retailers and big manufacturers, including diversified manufacturer General Electric, which was the S&P 500's top advancer.

Oil prices fell as supply concerns eased, after having surged close to $100 a barrel on Monday and heightening worries about the impact of higher energy costs on businesses and on consumers during the holiday shopping season.

Among banks, shares of Citigroup, the No. 1 U.S. bank, shares jumped 6.7 percent to $32.29, while those of Bank of America Corp, the No. 2 U.S. bank, surged 4.5 percent to $44.85.

Shares of AIG, the world's largest insurer by market value, finished up 5.9 percent at $57.72.

FREDDIE MAC, WELLS FARGO

The rally also helped boost shares of two financial companies that had released downbeat news late on Tuesday.