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NEW YORK (Reuters) - A late rally in U.S. stocks pulled Wall Street out of bear market territory on Tuesday, and the euro rose versus the dollar after Federal Reserve Chairman Ben Bernanke promised more economic stimulus if needed.
U.S. markets once again turned on news out of Europe.
Reports that European finance ministers agreed to prepare action to safeguard their banks, following the first bailout of a lender as a result of the region's debt crisis, were cited as giving stocks a boost heading into the close.
Investors also took Bernanke's speech to Congress as leaving the door open for another round of quantitative easing policies, helping to offset concerns about the economic consequences of a possible Greek default.
It also reduced the safe-haven appeal of U.S. government bonds and the dollar, allowing the euro to rally more than 1 percent.
The S&P 500 Index .SPX, a broad measure of the U.S. stock market, had briefly entered bear market territory earlier in the session when it fell to a level 20 percent from its 2011 high. A bear market is usually a sign that stock losses may be sustained.
The steep losses attracted bargain hunters, who massively stepped into the market in the final hour of trading. Chip makers and large-cap technology shares led the market higher.
"To me, it looked mostly technical. It looked like the capitulation on the sell side," said Keith Springer, president of Springer Financial Advisors in Sacramento, California.
He said the reports out of Europe only added to buying frenzy that had started earlier.
"You could see it starting to turn anyway and that gave people an excuse" to buy, Springer said.
Market volatility will likely remain high as long as the euro zone debt crisis drags on investor sentiment. After markets closed, ratings agency Moody's downgraded Italy by three notches, increasing fears of contagion from Greece.
Athens appeared more likely to default on its debt after euro zone finance ministers postponed a vital aid payment to Athens until mid-November.
The impact of a possible default on the global economy and particularly on the banking sector worried markets after European Union ministers said they were reviewing the size of private-sector involvement in a second bailout package for Greece.
The three major U.S. stock indexes had fallen more than 2 percent earlier in the day, but recovered after Bernanke's speech.
The Dow Jones industrial average .DJI closed up 153.41 points, or 1.44 percent, at 10,808.71, while the Standard & Poor's 500 Index .SPX rose 24.72 points, or 2.25 percent, to 1,123.95. The Nasdaq Composite Index .IXIC climbed 68.99 points, or 2.95 percent, to 2,404.82.
The U.S. bank sector index .GSPF, down nearly 30 percent since the 2011 market high hit on April 29, posted strong gains. The index finished the session up 4.1 percent as shares of Morgan Stanley (MS.N) jumped 12.3 percent.
The MSCI All-Country World index .MIWD00000PUS, a gauge of world stocks, trimmed losses, but still fell 0.3 percent.
U.S. crude oil prices slid $1.94, or 2.5 percent, to close at $75.67 a barrel, the lowest settlement since September 23, 2010, on fears that a global slowdown will curb demand for oil and other commodities.
The euro, however, rallied 1.27 percent against the dollar to $1.3347, after hitting a near nine-month low against the greenback earlier in the session.
"This is just a correction in a euro bear market," said Jay Meisler, co-founder of Global-View.com in Huntington, New York.
"Part of the rally could be traced to Trichet as well," he added, in reference to the president of the European Central Bank, Jean-Claude Trichet. "He could have signaled a rate cut today, but he did not. So you've got to go on the assumption that the ECB is not going to cut rates this week."
The ECB's policy-makers are to meet on Thursday. There have been expectations in markets that the ECB would raise rates on Thursday.
In the government debt market, longer-dated Treasuries led the losses, with the 30-year bond falling 1-26/32 points in price for a yield of 2.807 percent.
Additional reporting by Rodrigo Campos, Nick Olivari, and Daniel Bases; Editing by Leslie Adler