NEW YORK - US stocks rallied for a second straight day on Thursday after Federal Reserve chairman Ben Bernanke said the central bank was prepared to take 'substantive' action on interest rates to counter economic headwinds.

The market got further support from a report that troubled mortgage group Countrywide was nearing a deal to sell itself to Bank of America, and from speculation that Delta Air Lines was in merger discussions.

At the closing bell, the Dow Jones Industrial Average was up 116.08 points (0.91 per cent) at 12,851.39 after wobbling in a 300-point range during the session.

The markets rallied, then faded after Mr Bernanke's remarks before moving higher later in the day, helped by the corporate merger news.

Mr Bernanke moved the market with his comments in Washington that 'in light of recent changes in the outlook for and the risks to growth, additional policy easing may be necessary.'

He added: 'We stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks.' The market took that as a clear signal the Fed is set to cut rates, probably by half a percentage point, later this month.

'Financial markets had already raised the odds of a 50 basis point cut in the target federal funds rate to near 75 per cent, and Mr Bernanke's speech did not dissuade the markets from the view that this is the most likely outcome,' said Mr Brian Bethune at Global Insight, who said the futures market is now pricing in the probability of a 50-basis-point rate cut at over 90 per cent. -- AFP