NEW YORK - Wall Street roared back on Tuesday, a day after its worst sell-off in 21 years as investors bet Washington would revive a plan to stabilise the U.S. financial sector following its surprising defeat on Monday on Capitol Hill.

Adding to the positive tone was a Reuters report that U.S. regulators intend to provide new accounting guidelines that could slow the heavy flow of mortgage-related losses on banks' balance sheets. The Dow jumped 485 points after posting a one-day record loss of 778 points on Monday.

Strains persisted in credit markets, however, suggesting banks remain reluctant to lend to each other, and September marked the benchmark S&P 500's worst month in six years.

The S&P 500 rose more than 5 percent, recovering more than half of the losses booked on Monday when the House of Representatives rejected the plan, which would have let the U.S. Treasury buy bad mortgage debt from stressed banks so they can resume lending.

Tuesday's climb marked the S&P's best one-day percentage gain since July 2002.

"The president's saying that they'll get something passed this week has definitely calmed nerves," said Marc Pado, market strategist at Cantor Fitzgerald & Co in San Francisco.

"And if a bill doesn't pass, a change in accounting rules might be enough to break the lock in credit markets," he added. "It won't support us forever, but it will buy time and break the stranglehold on the banks."

Under current rules, banks must value assets based on what they would fetch in a current market transaction. Since prices for mortgage-related assets have long been at distressed levels, banks have been forced to scurry for more capital.

The Dow Jones industrial average rallied 485.21 points, or 4.68 percent, to 10,850.66. The Standard & Poor's 500 Index jumped 58.35 points, or 5.27 percent, to 1,164.74. The Nasdaq Composite Index climbed 98.60 points, or 4.97 percent, to 2,082.33.

It is not unusual for big sell-offs like Monday's to be followed by a short-term relief rally, Mary Ann Bartels, chief U.S. market analyst at Merrill Lynch, wrote in a note to clients. Of the eight times the S&P fell by at least 8.79 percent, a next-day rally occurred six times, she said.

Between July and September, though, the S&P 500 index posted its worst quarter since the third quarter of 2002 and its biggest monthly drop since September of the same year.

What happens next in Washington, investors said, would be instrumental in providing direction for the broader market.

"I am worried that if there is no plan, then the credit squeeze will get worse and it will be like a boa constrictor has got the economy and just keeps squeezing," said Al Kugel, chief investment strategist at Atlantic Trust in Chicago.

The bailout plan's surprising defeat rattled markets around the globe, with Asian stocks following Wall Street's Monday slide overnight. European shares recovered after Bush's remarks and on data showing improvement in U.S. consumer confidence. -- REUTERS