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Stocks soar over 3 percent as Fed adds liquidity

NEW YORK (Reuters) - Stocks rallied more than 3 percent on Tuesday, giving the S&P 500 its best advance since October 2002, after the Federal Reserve said it would add up to $200 billion to strained credit markets in a coordinated effort with other central banks.

The Dow and Nasdaq rang up their biggest daily percentage gains since March 2003. The Fed said it was expanding a lending program and will accept a broader base of securities as collateral, including mortgage bonds whose value has declined as the housing bubble burst.

Shares of mortgage-related companies and banks led the way, helping the market recover after three days of losses. Stocks had been close to their lows for the year as recession fears mounted.

Shares of Fannie Mae, the largest U.S. mortgage finance company, advanced 11.1 percent to $22.00, and Citigroup Inc, the largest U.S. bank, climbed 9.1 percent to $21.49.

Home builders’ shares also rallied, as the Fed’s action could help boost mortgage lending and ease the drag of the housing slump on the broader economy.

Analysts said an extended rally hinges on the health of the beleaguered credit markets.

“The key to any sustainable rally is going to be an improvement on the credit side,” said Michael Darda, chief economist at MKM Partners LLC, in Greenwich, Connecticut. “The Fed’s making a major effort to get liquidity and credit into the cracks and crevices of the financial system that need it the most.”

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The Dow Jones industrial average soared 416.66 points, or 3.55 percent, to 12,156.81.

The Standard & Poor’s 500 Index climbed 47.28 points, or 3.71 percent, to 1,320.65 in its biggest daily percentage gain since October 2002.

The Nasdaq Composite Index gained 86.42 points, or 3.98 percent, to 2,255.76.

On the Nasdaq, shares of Apple Inc rose 6.4 percent to $127.35, leading gainers. Google Inc’s shares climbed 6.3 percent to $439.84 as the company closed its $3.1 billion acquisition of DoubleClick Inc.

A TRANQUILIZER FROM THE FED

Shares of Freddie Mac, the No. 2 U.S mortgage company, gained 16 percent to $20.16, while Bank of America Corp shot up 6.8 percent to $37.72.

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Bear Stearns, which slid as low as $55.42, its lowest in a little more than five years, recovered to finish up 1.1 percent at $62.97 after U.S. Securities and Exchange Chairman Christopher Cox said the SEC was comfortable with the “capital cushions” at the five largest U.S. investment banks, including Bear Stearns.

Joe Saluzzi, co-manager of trading at Themis Trading in Chatham, New Jersey, said Cox’s comments boosted Bear’s stock and “carried the rest of the market with it.”

Meanwhile, the dollar rose sharply following the Fed’s move as concerns about a deepening credit crisis and U.S. recession abated.

Ted Oberhaus, manager of equity trading at Lord Abbett & Co., said, with respect to the Fed’s liquidity action, that “if they can stabilize the credit markets without putting undue pressure on the dollar, the Fed will have won this leg of the journey.”

The brief surge in U.S. crude oil futures prices to a record high above $109 a barrel helped shares of Exxon Mobil Corp rise 5.1 percent to $86.68, making the oil company’s stock the top gainer in the S&P 500.

Among home builders, shares of Centex Corp climbed 11.5 percent to $21.67. The Dow Jones U.S. home construction index jumped 8.7 percent.

Volume was heavy on the New York Stock Exchange, where about 1.95 billion shares changed hands, above last year’s estimated daily average of 1.9 billion shares. On the Nasdaq, about 2.45 billion shares traded, above last year’s daily average of 2.17 billion.

Advancing shares outnumbered declining shares on the NYSE by a ratio of about 5 to 1 and almost 3 to 1 on the Nasdaq.

Additional reporting by Caroline Valetkevitch; Editing by Jan Paschal

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