NEW YORK, Dec 16 - U.S. stocks rallied on Tuesday after the Federal Reserve rewrote its playbook by slashing borrowing costs to a record low, even zero, and pledging more unconventional steps to fight the deepest recession in generations.

Banks led the charge higher, spurred both by the Fed's move to cap its target lending rate at a quarter percentage point and by a quarterly loss from Wall Street icon Goldman Sachs that was not as gruesome as many feared. Goldman's stock gained more than 14 percent, outshining an 11 percent advance in the S&P 500's financial index.

Stocks were up modestly all day on optimism that the Fed, at its last meeting of 2008, might take dramatic measures to combat the credit crisis and global economic slowdown. But the rally caught fire right after the central bank released its statement in mid-afternoon, pushing the benchmark Standard & Poor's 500 index to its highest closing level since Nov. 10 and driving each of the major U.S. stock indexes to their best one-day performance for the month.

"We've got a Fed that's willing to really go the distance for the market right now."

The Dow Jones industrial average rose 359.61 points, or 4.20 percent, to 8,924.14. The Standard & Poor's 500 Index jumped 44.61 points, or 5.14 percent, to 913.18. The Nasdaq Composite Index climbed 81.55 points, or 5.41 percent, to 1,589.89.

In a unanimous vote, the Fed made a larger-than-expected cut to the the benchmark federal funds rate by at least three-quarters of a percentage point to a target range of zero to 0.25 percent from its current 1 percent.

The U.S central bank said that it will employ all available tools to promote the resumption of growth and preserve price stability.

Shares of Goldman Sachs surged after the company reported its first quarterly loss since going public in 1999, but its results were not as dire as some had anticipated.

Also improving investor sentiment were better-than-expected quarterly earnings from electronics retailer Best Buy, which buoyed technology stocks. Companies such as Microsoft Corp and Intel, which draw significant revenues from consumer demand for electronic products, were among the Nasdaq's top advancers.

JPMorgan Chase & Co was the Dow's top performer, up 13 percent at US$32.35, while Goldman Sachs' stock jumped 14.4 percent to US$76 on the New York Stock Exchange.

Best Buy's stock jumped almost 18 percent to US$27.68 after its quarterly earnings beat estimates and the company revealed plans to offer employee buyouts and reduce store openings in an effort to combat reduced consumer spending.

Microsoft advanced 5.6 percent to US$20.11, while Intel gained 7.2 percent to US$15.64.

Shares of General Electric rose 5.7 percent to US$17.92 after the U.S. conglomerate issued guidance for the rest of 2008, but said that it will no longer be providing specific quarterly earnings-per-share guidance going forward.

Economic data earlier in the session continued to show effects of the recession, with U.S. consumer prices plunging at a record rate for a second straight month in November and housing starts tumbling to a record low.

Volume was low on the New York Stock Exchange, with about 1.54 billion shares changing hands, below last year's estimated daily average of roughly 1.90 billion. On Nasdaq, about 2.25 billion shares traded, above last year's daily average of 2.17 billion.

Advancing stocks outnumbered declining ones on the NYSE by a ratio of almost 6 to 1, while on the Nasdaq, seven stocks rose for every two that fell.

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