At the close of regular trading, the Nasdaq jumped 274.02, or 10.5 percent, to 2,889.77, its largest single-day percentage gain in history. The Standard & Poor's 500 index climbed 51.29, or almost 4 percent, to 1,376.26. The Dow Jones industrial average rose 338.62, or more than 3 percent, to 10,898.72.
About seven stocks advanced for every three that declined on the Nasdaq, which generated a volume of 2.46 billion shares, the fifth-largest day in the history of the index. Volume on the New York Stock Exchange reached a heavy 1.38 billion shares as winners beat out losers more than 2-to-1.
In a speech at the America's Community Bankers' conference in New York, Federal Reserve Chairman Alan Greenspan suggested that the Fed may be finished raising interest rates to slow the economy. He suggested that the Fed may instead cut rates should the nation show any signs of a recession.
With analysts and economists interpreting every his every word and expression, Greenspan said the economy has slowed from the boom conditions of the late '90s to a "more sustainable" level. He did not indicate that the Fed sees a downturn in the near term.
"The pace of expansion of economic activity has moderated appreciably, in part as tighter financial conditions have had some impact on interest-sensitive areas of the economy," he said.
Greenspan's comments Tuesday came four years to the day after he uttered the oft-repeated phrase "irrational exuberance" to describe lofty stock prices at the end of 1996.
At the time, the Dow was trading around 6,437, having jumped 33 percent in 1995 and another 25 percent through Dec. 5, 1996. It remained flat through the remainder of the year following Greenspan's speech but went on to post returns of 23 percent in 1997, 16 percent in 1998 and 25 percent in 1999.
Investors interpreted Tuesday's speech as a sign that the Fed will change its interest rate bias to neutral when it meets Dec. 19--in other words, it is not likely to endorse a rate hike. Its current stance is a bias in favor of raising rates. Changing the bias to neutral would open the door to rate reductions, possibly in the first half of 2001.
Economists beamed with delight at Greenspan's pronouncements.
Upon hearing of Greenspan's speech, "I found myself saying 'Is this a dream?'" said Paul Christopher, an economist at A.G. Edwards.
"We didn't expect the Fed to reverse themselves this early," he said, noting that just three weeks ago the Fed said a tight labor market and high energy prices presented risks of inflation pressure.
The shift in the Federal Reserve's bias means that the Fed believes positive economic factors outweigh the risk of accelerating inflation.
The Fed has raised interest rates six times since June 1999 to quell the red-hot economy. An interest rate hike usually increases borrowing costs for businesses, which moderate economic activity.
The cut gives investors a reason to plow some cash back into stocks, some analysts said.
Fund managers "have to play; they can't sit on the sidelines trying to figure if it's going to be a hard landing or a soft landing" for the economy, said Jeff Logsdon, a market analyst at Gerard Klauer Mattison.
"He said exactly what the markets wanted to hear," said Drew Matus, an economist at Lehman Brothers. "This is definitely a positive, (and) the bias is definitely gone in November."
The Greenspan-induced surge in stocks extended an early rally that was sparked by a Florida judge's refusal Monday to order a recount of several thousand presidential ballots. Political analysts said the decision was a setback for Vice President Al Gore and a victory for Texas Gov. George W. Bush.
Although Gore appealed to the Florida Supreme Court, his lawyers said they would consider the court's decision as final, raising hopes that the election uncertainty is nearing an end.
The CNET tech index rose 203.24 to 2,422.89. Advancers outnumbered decliners, with 88 of the 97 stocks in the index rising, seven falling and two remaining unchanged.
All of the 18 sectors tracked by CNET Investor rose. Server hardware companies led the way, rising about 16 percent, followed by providers of services to Internet companies, which gained 14 percent.
The next major issue ahead for the markets is the earnings pre-announcement season, when companies inform investors of significant financial developments before earnings news is officially released for the quarter. A raft of companies have issued warnings in recent quarters as their revenue growth declines and earnings per share shrink.
"All (pre-announcement) news is negative, and with Reg FD, we'll probably hear more of it," said Arthur Hogan, chief market analyst at Jefferies.
Regulation Fair Disclosure, or Reg FD, is a recent rule enacted by the Securities and Exchange Commission. It forbids companies from selectively disclosing market-sensitive information to a select group of Wall Street professionals. Companies must now release such information to the public at large if they do so at all.
Despite a potential flood of bad news, Hogan believes that the markets should weather the preannouncement season fairly well, since the recent election turmoil has beaten stocks down to an oversold level.
Among large-cap tech stocks, Microsoft closed up $3.44 to $59.88; Intel gained $3.06 to $36; Cisco Systems rose $6.31, or about 14 percent, to $52.13; and Sun Microsystems gained $12.88, or 16 percent, to $91.75.
Optical networking stocks also made strong gains. Ciena rose $19.63, or 24 percent, to $99.81; JDS Uniphase advanced $9.56, or 16 percent, to $68.13; and Corning climbed $7.63, or 12 percent, to $69.13.
High-profile Internet stocks joined the upward surge. Yahoo rose $5.94, or about 16 percent, to $43.88; eBay jumped $7.19, or 22 percent, to $39.50; and America Online closed up $3.07 at $44.12.
3Com, a maker of networking equipment, said Monday that earnings and revenue will fall short of of expectations. The shares closed down $3.34, or 25 percent, to $10.03.
Red Hat, a seller of Linux software and services, closed three offices and laid off 20 employees Monday. The shares dipped 13 cents to $6.22.
Internet advertising company DoubleClick plans to cut its work force by less than 10 percent, the latest sign of trouble for the online advertising industry. The company will lay off between 100 and 150 employees out of a total staff of 2,100. The shares rose $1, or 8 percent, to $13.
Shares of Transmeta rose $13, or 54 percent, to $37. Salomon Smith Barney analyst Jonathan Joseph initiated the chipmaker at "outperform" with a price target of $32 a share.
Chipmaker Xilinx warned Monday that revenue for the third fiscal quarter will grow only 5 percent to 7 percent from the second quarter, compared with a previous growth estimate of 12 percent. The shares climbed $1.88 to $43.56.
Despite the news, chip stocks turned in a strong day. The Philadelphia semiconductor index rose 55.93, or 10 percent, to 607.41, led by Texas Instruments, which gained $6.06, or 15 percent, to $45.69.