Fall in oil price spurs U.S., Europe stocks rally

By Herbert Lash

NEW YORK (Reuters) - U.S. and European stocks rose on Wednesday after oil prices fell sharply on news of an unexpected leap in U.S. crude supplies last week and a big U.S. bank posted surprisingly strong results, easing investor fears about the battered financial sector.

Spot gold prices tumbled about 2 percent as crude oil slid and the dollar extended gains after Federal Reserve Chairman Ben Bernanke said that under certain conditions currency intervention may be warranted.

Shares in the beaten-down financial sector surged. The S&P financial index .GSPF rose 6.3 percent, while the KBW Banks index .BKX surged 9.4 percent.

Not all the news was positive. Data showed U.S. consumer price inflation accelerated to an annual rate of 5 percent in June -- well above economists' forecasts -- and U.S. government debt prices fell sharply.

U.S. crude oil futures fell more than 4 percent after a U.S. government agency reported a surprise uptick in import levels, causing crude prices to chalk up the biggest two-day loss in percentage terms since January 2007.

While the two-day drop in the price of oil of almost $15 only brought crude to a three-week low, the fall was enough to help Wall Street rally more than 1 percent. Equity markets had slipped entirely into a bear market earlier this week.

An index of top European shares also closed higher, a day after hitting a three-year closing low.

Stronger-than-expected quarterly results by Wells Fargo (WFC.N), the No. 5 U.S. bank, helped turn a sour mood on Wall Street that has seen banking shares slide to decade lows as the sector looks for still more capital after record infusions.

Wells Fargo raised its dividend 10 percent despite a 23 percent decline in profit caused by a surge in bad loans, and its shares jumped 24 percent to $25.42.

Despite the weak economy, Chief Executive John Stumpf said Wells Fargo was "one of the best positioned in financial services to growth through this adversity."

The results offered a beacon of hope for investors who have seen fear of the global credit crisis wreck havoc on the financial sector. The share price of many financial shares have lost half or more of their value this year.

Before 1 p.m., the Dow Jones industrial average .DJI rose 140.77 points, or 1.28 percent, at 11,103.31. The Standard & Poor's 500 Index .SPX added 13.09 points, or 1.08 percent, at 1,228.00. The Nasdaq Composite Index .IXIC gained 39.37 points, or 1.78 percent, at 2,255.08.

OIL DROP, BERNANKE SEND EUROPEAN SHARES HIGHER

European shares turned positive after crude fell and in response to Bernanke's comments about currency intervention.

The FTSEurofirst 300 .FTEU3 index of top European shares closed up 0.53 percent to 1,115.97 points.