US STOCKS-Extraordinary rescue effort spurs Wall St rally
* Financial stocks lead on US plans to stabilize markets
* SEC imposes temporary ban on short sales
* US Treasury to back money market mutual funds
* Dow up 3.4 pct, S&P up 4 pct, Nasdaq up 3.4 pct
(Updates to close)
NEW YORK, Sept 19 (Reuters) - Sweeping government measures to rescue the financial system and restore confidence in shaky markets spurred a huge relief rally in U.S. stocks on Friday, ending a week when the financial landscape underwent the most dramatic reshaping since the Great Depression.
The benchmark S&P 500 index had its biggest two-day rally since October 21, 1987, two days after the 1987 stock market crash.
Led by U.S. Treasury Secretary Henry Paulson, officials are working on a solution to mop up hundreds of billions of dollars worth of bad mortgage debt.
In another extraordinary action, the United States joined the United Kingdom in temporarily banning bets that financial stocks will fall, while the Federal Reserve said it will use $50 billion to back money-market mutual funds.
The moves came at the end of an agonizing week for Wall Street, in which Lehman Brothers filed for bankruptcy, insurer American International Group (AIG.N) was bailed out by the government and Merrill Lynch MER.N was forced into a shotgun marriage with Bank of America (BAC.N). Investors had worried that the confluence of crises severely threatened the stability of the U.S. economy.
But even with the furious two-day rally, stocks still ended essentially flat in a week marked by extreme volatility -- with the Dow plummeting more than 500 points on Monday, only to rise on Tuesday and drop again on Wednesday.
"The government plan is seen as a comprehensive solution rather than a series of ad hoc, piecemeal moves," said John Praveen, chief investment strategist at Prudential International Investments Advisers LLC in Newark, New Jersey, noting that the ban on short-selling was also contributing to the surge in financial stocks as short sellers bought stocks to close out their positions.
An S&P index of financial stocks .GSPF jumped 11.1 percent.
Short sellers, who profit when stocks fall, have been blamed for contributing to the demise of Lehman Brothers and the steep declines in other financial stocks this year.
The Dow Jones industrial average .DJI closed up 368.75 points, or 3.35 percent, at 11,388.44. The Standard & Poor's 500 Index .SPX advanced 48.57 points, or 4.03 percent, to 1,255.08. The Nasdaq Composite Index .IXIC shot up 74.80 points, or 3.40 percent, to 2,273.90.
Shares of Washington Mutual (WM.N) surged 42.1 percent to $4.25 after the Wall Street Journal reported that Citigroup (C.N) was considering making a bid for the U.S. savings and loan. Citigroup shares leaped 22.7 percent to $20.65 on the New York Stock Exchange.
Shares of Morgan Stanley (MS.N), punished earlier this week as investors fretted about the outlook for the last two remaining U.S. investment banks, jumped 20.7 percent to $27.21. Shares of rival Goldman Sachs (GS.N) climbed 20.2 percent to $129.80.
Morgan Stanley's talks with Wachovia Corp WB.N, China Investment Corp and other institutions continue, a person familiar with the matter said, though the rebound in its securities gives the investment bank more time to consider its options. Wachovia's stock surged 29.3 percent to $18.75.
Trading was heavy on the New York Stock Exchange, with about 3 billion shares changing hands, far above last year's estimated daily average of roughly 1.9 billion, while on Nasdaq, about 3.8 billion shares traded, also trouncing last year's daily average of 2.17 billion.
Advancing stocks outnumbered declining ones on the NYSE by about 7 to 1 and on the Nasdaq, by about 2 to 1. (Additional reporting by Steven C. Johnson; Editing by Jan Paschal)
