NEW YORK, US - US stocks surged sharply higher on Tuesday after the Federal Reserve left interest rates unchanged and a decline in oil prices eased inflation worries, stoking hopes for consumer spending.

The Dow Jones Industrial Average, extending strong earlier gains, leaped 331.62 points (2.94 per cent) to close at 11,615.77, and the tech-heavy Nasdaq composite jumped 64.27 points (2.81 per cent) to 2,349.83.

The broad-market Standard & Poor's 500 index advanced 35.87 points (2.87 per cent) to end the session at 1,284.88.

With the exception of oil firm Chevron, the Dow's 29 other components all finished in the green.

The market euphoria, which broke a three-session losing streak, came amid a continued decline in crude oil prices and the Fed's decision to hold its key short-term rate unchanged at 2.0 per cent.

Although the decision was widely expected, investors found relief in the Federal Open Market Committee's (FOMC) accompanying statement saying that the world's largest economy was facing competing issues of lackluster growth and inflationary risks.

Most analysts said that was a signal that interest rates would remain unchanged for some time.

'The Committee is likely to need some hard data that conditions are getting better before they start to unwind the rate cuts', said Mr Joel Naroff of Naroff Economic Advisors.

'The Fed is on hold at least through the fall and likely further'.

The Fed, chaired by Mr Ben Bernanke, has now held the federal funds rate unchanged for two straight policy meetings after slashing rates by 3.25 percentage points between September and late April in a bid to fire up flagging economic growth.

Oil prices kept losing steam after shedding nearly four dollars on Monday. New York's main contract, light sweet crude for September fell US$2.24 (S$3.09) to close at US$119.17 a barrel.

US crude prices have tumbled almost 20 per cent since reaching a record-high US$147.27 dollars a barrel on July 11.

Analysts said the price retreat underscored the market's profound concern about demand in a slowing global economy.

'A drop in oil prices is good news for the economy from a consumption standpoint and from an inflation standpoint', said Mr Patrick O'Hare, an analyst at Briefing.com.

The only main economic indicator on the calendar, services sector activity, declined less than expected in July.

Among stocks in focus, consumer products giant Procter & Gamble, a Dow component, rose 3.27 per cent to US$67.97 dollars after reporting a 33 per cent jump in fourth-quarter net profit despite higher commodity prices.

The financial sector drew some support from better-than-expected earnings from French bank Societe Generale, analysts said.

Bank of America climbed 2.94 per cent to US$33.58, Citigroup surged 5.79 per cent to US$19.92, Lehman Brothers shot up 12.82 per cent to US$20.24, Merrill Lynch gained 6.93 per cent at US$28.22 and JPMorgan Chase advanced 4.36 per cent to US$41.89.

Rupert Murdoch's media empire News Corp racked up a 4.67 per cent rise at US$15.25 after reporting strong profit gains in the fourth quarter and the fiscal year, lifted by double-digit revenue increases.

Bond prices weakened. The yield on the 10-year US Treasury bond rose to 4.007 per cent from 3.972 per cent on Monday, while that on the 30-year bond climbed to 4.629 per cent from 4.589 per cent.

Bond yields and prices move in opposite directions. -- AFP