Investors, their confidence buoyed earlier in the day by resilient results from Lehman Brothers and Goldman Sachs, welcomed the Federal Reserve's cut in interest rates even though it was not quite as big as expected.

The rate cut and the quarterly results eased fears that another big financial institution would be crushed by the unforgiving credit markets. Stocks had their biggest rally since October 2002.

"The run on the investment banks would appear to be over,'' Doug Peta, a market strategist with J&W Seligman & Co., told Bloomberg News.

The Dow Jones industrials surged 420.41 points, or 3.5 percent. It was its fourth-biggest point gain ever. The S&P 500 gained 54.14 points, or 4.2 percent.

The market reaction indicates that the Fed had already done its most important work in unveiling this weekend another round of emergency measures to make hundreds of billions of dollars available to halt a panic in the credit markets.

Still, today's rate cut was welcome, coming as it does after an unusually aggressive campaign of monetary easing. Last summer, when the credit crunch exploded into a global crisis, the Fed's benchmark rate, its target for the federal funds rate, was 5.25 percent. When the year began, it was at 4.25 percent. Now it is at 2.25 percent, much less than the annual rate of inflation. 

In announcing the rate cut, the central bank's statement gave a bleak summary of the current economic slowdown.

"Recent information indicates that the outlook for economic activity has weakened further. Growth in consumer spending has slowed and labor markets have softened. Financial markets remain under considerable stress, and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters."

But the Fed also pointed to the danger of inflationary pressures building, saying that uncertainty about the inflation outlook has increased. "Inflation has been elevated, and some indicators of inflation expectations have risen," the Fed said.

Such concerns worked against a full-point rate cut. Indeed, the vote to cut rates was unusually divided, 8 to 2, with two central bank governors wanting "less aggressive action."