NEW YORK - US shares staged a powerful rally on Wednesday as a late rebound brought the main indexes back from punishing losses a day after the Federal Reserve slashed interest rates.

The Dow Jones Industrial Average leapt 298.98 points, or 2.5 per cent, to close at 12,270.17 and the tech-heavy Nasdaq added 24.14 points, or 1.05 per cent, at 2,316.41.

The broad-market Standard & Poor's 500 index rose 28.10 points, or 2.14 per cent, to 1,338.60, according to final closing figures.

The rally ended five straight losing sessions as investors appeared to warm to the idea of the Fed's unprecedented three-quarters of a percentage point cut in its base federal funds rate, to 3.5 per cent.

News of a meeting between New York regulators, bond insurers and their customers lifted the market out of negative territory in late afternoon trading, pushing the Dow and S&P up more than 2 per cent by the close. That marked a sharp turnaround from earlier in the day, when the Dow and the S&P were each down more than 2 per cent.

'The speculation that mortgage insurers could potentially get a bailout helped the market stabilise. That was enough to get the market going. There was no real silver bullet news that came through,' said Mr Joe Saluzzi, co-manager of trading at Themis Trading in Chatham, New Jersey.

Some analysts suggested the move smacked of panic in the face of a rapidly deteriorating situation, because it came only a week ahead of the Fed's scheduled Jan 29 to 30 meeting.

Mr Al Goldman at AG Edwards said the market would head lower as it priced in a likely recession and a probable decline in corporate earnings.

'There will be some second guessing about yesterday's rally off the lows as investors re-evaluate whether the Fed's emergency action means things are much worse for the economy than they now think,' he said.

Stocks started the day sharply weaker, with disappointing profit forecasts from Apple Inc and Motorola adding to worries about a recession and the outlook for the tech sector.

The Nasdaq was down more than 3 per cent at one point, and, for the second day, the index briefly crossed the threshold of a bear market, which is defined as falling 20 per cent or more from a recent closing high.

After Tuesday's closing bell, Apple forecast a quarterly profit below analysts' expectations and reported disappointing holiday-season iPod shipments. Apple's stock sank 10.7 per cent to US$139.07 (S$199) on the Nasdaq.

Mobile phone maker Motorola Inc forecast a loss for the current quarter and said it expects a challenging year. Motorola shares lost 18.4 per cent to US$10.05 and ranked among the biggest percentage losers on the New York Stock Exchange.

Amid a severe housing slump, tight credit and a weakening labour market, the markets also have been disappointed by US President George W Bush's economic stimulus plan, announced last week.

Some see the White House action as confirmation that the world's biggest economy is headed for trouble. -- AFP, REUTERS

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