Wall Street rallies on Fed rate signals and oil retreat

NEW YORK (Reuters) - Stocks soared on Tuesday after the Federal Reserve signaled that it is in no rush to raise interest rates and oil prices tumbled further, spurring the Dow and the S&P to their best day in four months.

The Dow rose more than 300 points.

The Fed, as expected, left benchmark lending rates unchanged at 2 percent, and its accompanying statement soothed investors who had worried that inflation headwinds would force the central bank to drive up borrowing costs in coming months.

Oil prices fell more than 2 percent, closing below the $120 a barrel mark for the first time in three months. That provided further relief on the inflation front and offered hope for consumer spending, which has been pressured by record gasoline prices.

Big winners on the day included retailers, banks and airlines, while commodity-related shares extended their retreat along with the drop in price of crude oil and gold.

"The market seems to be reacting somewhat favorably to the idea the Fed will not raise interest rates any time soon. It appears that the Fed has actually taken a little more of a dovish stance, speaking more about the downside risks to growth," said Richard Sparks, senior equities analyst, Schaeffer's Investment Research.

The Dow Jones industrial average .DJI surged 331.21 points, or 2.94 percent, to 11,615.36, while the Standard & Poor's 500 Index .SPX jumped 35.59 points, or 2.85 percent, at 1,284.60.

The Nasdaq Composite Index .IXIC rose 64.27 points, or 2.81 percent, to 2,349.83.

Financial shares soared, led by a 12 percent gain in shares of insurer American International Group (AIG.N) to $29.89. The S&P financials sub-index .GSPF rose more than 5 percent.

Analysts at UBS upgraded AIG to "buy" from "neutral" on valuation and said the world's largest insurer was well-positioned to absorb further losses and didn't need to raise capital.

Shares of Procter & Gamble Co (PG.N), the world's largest consumer products maker whose products range from Pampers diapers to Olay skin-care products, rose after the company posted a stronger-than-expected quarterly profit. Shares rose 3.3 percent to $67.97.

Planemaker Boeing (BA.N) rose 6.3 percent to $65.20 and lifted the Dow industrials, while an index of retail shares .RLX rose 5.4 percent.

U.S. crude futures ended lower for a second day in a row, with oil operations in the Gulf of Mexico starting to return to normal as Tropical Storm Edouard moved inland after striking the Texas coast.

Early in the session, data from the Institute for Supply Management showing that the U.S. service sector shrank less than expected in July helped set the positive tone in the stock market. The ISM report included a decline in the prices paid index.

Trading was moderate on the New York Stock Exchange, with about 1.4 billion shares changing hands, below last year's estimated daily average of roughly 1.9 billion, while on Nasdaq, about 2.33 billion shares traded, above last year's daily average of 2.17 billion.

Advancing stocks outnumbered declining ones by 3 to 1 on the NYSE and by about 2 to 1 on the Nasdaq.

(Additional reporting by Walter Brandimarte; Editing by Leslie Adler)