Wall Street staged its biggest rally in five years Tuesday as investors cheered the latest move by the Federal Reserve to shore up the nation's...

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Wall Street staged its biggest rally in five years Tuesday as investors cheered the latest move by the Federal Reserve to shore up the nation’s shaky financial system.

The Dow Jones industrial average rocketed 416.66 points, or 3.6 percent, to 12,156.81, while the Standard & Poor’s 500 index jumped 3.7 percent to 1,320.65.

Microsoft, one of the 30 Dow stocks, gained $1.23 to close at $29.28 a share. Boeing, also a Dow stock, fell 98 cents to $73.40.

Those percentage gains were the biggest one-day advances for the market benchmarks since the early days of the U.S. invasion of Iraq in March 2003.

The tech-heavy Nasdaq climbed a whopping 4 percent to 2,255.76.

The rally followed the Fed’s surprise announcement that it would lend up to $200 billion to banks and other financial institutions and would accept troubled debt, including slumping mortgage-backed securities, as collateral.

The move makes it less likely that bad debt related to the meltdown in the housing industry will sink a major bank or Wall Street firm, analysts said.

Moreover, the Fed is moving in concert with central banks in Canada and Europe, which pledged to inject up to $45 billion into their financial systems.

“This is the formula that investors have been waiting for,” said A.C. Moore, chief investment strategist with Dunvegan Associates in Santa Barbara, Calif.

The move comes as banks and other financial institutions face cash crunches.

“Pressures in some of these markets have recently increased again,” the Fed said. “We all continue to work together and will take appropriate steps to address those liquidity pressures.” The other banks involved are the Bank of Canada, the Bank of England, the European Central Bank and the Swiss National Bank.

The Fed announced the creation of a new tool, called the Term Securities Lending Facility (TSLF), geared to provide primary dealers — big Wall Street investment firms and banks that trade directly with the Fed — with 28-day loans of Treasury securities, rather than overnight loans.

They would pledge other securities — including federal agency residential-mortgage-backed securities, such as those of mortgage giants Fannie Mae and Freddie Mac — as collateral for the loans of Treasury securities. Fed officials said that’s the first time they’ll be accepting mortgage-backed securities through this type of lending program.

“This will not turn the economy around or fix all the problems in the markets but it should reduce the liquidity issue, at least for now,” said Ian Shepherdson, chief economist at High Frequency Economics. The odds of a deep, three-quarters-of-a-percentage-point cut in the Fed’s key interest rate next Tuesday have dropped as the Fed’s new relief seemed to calm market turmoil, he said.

The loans would be made available through an auction process. Auctions will be held on a weekly basis, beginning March 27.

By allowing financial institutions to put up mortgage-backed securities — where there’s little appetite for them — in return for ultrasafe Treasury securities that are in high demand, the Fed hopes that will take pressure off financial companies and make them more inclined to lend, Federal Reserve officials said. They said this would ease the credit crunch.

The coordination with Europe helped strengthen the dollar, which rose Tuesday against the euro and the yen.

“The coordinated effort with the European central banks is important,” Moore said. “It suggests some stability for the dollar.”

Although the slipping dollar has been a boon for U.S. exporters, it has helped push oil prices to record levels, because crude is priced in the U.S. currency. That has contributed to inflation worries and made investors less receptive to the Fed’s recent rate cuts, which have sparked only short-lived rallies.

Tuesday’s rally also was fueled by bargain hunting. When the market opened Tuesday morning, the Dow was down more than 11 percent for the year.

Material from The Associated Press was used in this report.