While investors had been expecting the quarter-point increase in short-term lending rates, they were reassured by the central bank's accompanying statement, in which the Fed noted economic growth has moderated but that "some inflation risks remain." The Fed has tended to focus on inflation in past statements, but this time said it would look at the economy's growth rate as well as the impact of inflation in deciding whether to raise rates in the future.

"It's the first time the Fed has connected the weaker growth with the outlook for inflation," said Markus Schomer, economist for AIG's Global Investment Group. "That's very positive for the outlook going forward."

That language consoled a market worried that Chairman Ben Bernanke might raise rates so high in his fight against inflation that the economy would suffer. Today's hike to 5.25 percent was a foregone conclusion on Wall Street, and many traders are expecting another quarter-point raise when the Fed's Open Market Committee meets in August.

According to preliminary calculations, the Dow surged 217.24, or 1.98 percent, to 11,190.80, its biggest single-day jump since March 21, 2003, when it added 235.37 points. The Dow was up about 80 points before the Fed's announcement.

Broader stock indicators also saw their best sessions in years. The Standard & Poor's 500 index climbed 26.87, or 2.16 percent, to 1,272.87, its largest gain since rising 29.52 on March 14, 2003; the Nasdaq composite index jumped 62.54, or 2.96 percent, to 2,174.38, behind a 73.13-point advance on July 27, 2002.

Advancing issues topped decliners by more than 5 to 1 on the New York Stock Exchange, where volume of 1.39 billion shares led the 1.09 billion shares changing hands at the same point yesterday.

Bonds rose further on the Fed's statement, with the yield on the 10-year Treasury note tapering to 5.2 percent from 5.25 percent late yesterday. The 2-year yield dropped to 5.2 percent, a signal of heightened confidence in holding long-term debt.

Stocks have endured weeks of wildly erratic trading while the interest rate outlook remained cloudy, particularly after Bernanke earlier this month acknowledged that high energy prices could propel inflation. Investors, however, seemed to grow settled with the fact that the Fed would boost rates today and bid stocks higher ahead of the policy decision.

Schomer said the key change to the Fed's statement was a shift in wording about future rate increases. The central bank previously cautioned that further tightening could be required to contain inflation; in its latest opinion, the Fed simply said "any additional (policy) firming that may be needed" will depend on economic data.

"That suggested the door is open for more increases," Schomer said. However, "I think the overall tone sounds a little less hawkish."

But Jack Ablin, chief investment officer at Harris Private Bank, said the statement was inconsistent with the tough talk on inflation used by a number of Fed officials in recent speeches. Although investors may be relieved that the Fed has "taken the teeth out of the statement," the risk of stagflation — rising inflation in a stalled economy — is still out there, he said.

"This is an initial reaction," Ablin said. "The true test will be seen over the coming months as we see some of this trying data."

The Fed's announcement enabled Wall Street to look past a steep jump in oil prices after a report showed shrinking U.S. gasoline reserves amid the start of the busy summer driving season. A barrel of light crude leaped $1.33 to $73.52 on the New York Mercantile Exchange.

Elsewhere, the U.S. dollar retreated against the Japanese yen. Gold prices gained to about $590 per ounce.

Government reports issued hours before the Fed meeting pointed to an economy that isn't overheating. The Commerce Department raised first-quarter gross domestic product growth to a 5.6 percent annual rate but cut the GDP's inflation measure to 3.1 percent, feeding optimism that price increases may be under control.

A slight rise in jobless claims also bolstered hopes that a gradual weakening of the job market will be mirrored by the economy. First-time unemployment applications rose 4,000 to 313,000 last week, the Labor Department said.

In corporate news, cereal and snack-food maker General Mills Inc. posted a 52 percent drop in quarterly profit — matching Wall Street estimates — after the sale some of its businesses inflated year-ago results. General Mills rose 15 cents to $51.61.

Ford Motor Co. added to the auto industry's woes after The Wall Street Journal quoted Chairman and Chief Executive Bill Ford as saying the automaker was facing worse-than-expected sales declines amid high gasoline prices. Ford slipped 8 cents to $6.28.

Merrill Lynch upgraded Dow component McDonald's Corp. to "buy," citing forecasts for improved sales and margins. McDonald's gained $1.59 to $33.56.

The Russell 2000 index of smaller companies rose 26.28, or 3.82 percent, to 714.32.

In overseas trading well before the Fed's announcement, Japan's Nikkei stock average surged 1.58 percent. Britain's FTSE 100 climbed 1.99 percent, Germany's DAX index added 2.29 percent and France's CAC-40 was higher by 2.23 percent.