Nov. 28 (Bloomberg) -- U.S. stocks staged the biggest two- day rally in five years, led by financial shares, after Federal Reserve Vice Chairman Donald Kohn buttressed expectations for another interest rate cut.

Citigroup Inc., Lehman Brothers Holdings Inc., Morgan Stanley and Goldman Sachs Group Inc. rose more than 5 percent as banks and brokerages in the Standard & Poor's 500 Index gained the most since 2002. EBay Inc. and Amazon.com Inc. helped push the Nasdaq Composite Index to a 3.2 percent gain after Sanford C. Bernstein & Co. forecast a ``strong'' fourth quarter for both.

``Kohn's comments just add to a perception that the Fed is embarking on a sustained path of easing,'' said Michael Metz, the New York-based chief investment strategist at Oppenheimer Holdings Inc., which manages $60 billion. ``There's also huge relief that the worst of the financial crisis may be behind us.''

The Standard & Poor's 500 Index added 40.79, or 2.9 percent, to 1,469.02, bringing its two-day gain to 4.4 percent, the most since October 2002. The Dow Jones Industrial Average increased 331.01, or 2.6 percent, to 13,289.45, its best daily advance since April 2003. The Nasdaq Composite gained 82.11 to 2,662.91. More than 13 stocks rose for every one that fell on the New York Stock Exchange.

European shares also climbed, with the Dow Jones Stoxx 600 gaining 2.8 percent to 364.09, the most since 2003. U.S. Treasury and European government bonds fell as the stock-market gains reduced the appeal of fixed-rate investments.

Stocks rallied after Kohn said market ``turbulence'' may reduce credit to businesses and consumers, suggesting he sees higher risks to economic growth than a month ago. The third straight monthly decline in orders for U.S. durable goods added to speculation the Fed will cut rates to spur the economy. Orders for items made to last several years fell 0.4 percent in October, the Commerce Department said.

Rate Cut Odds

Traders boosted wagers that the Fed will cut its benchmark lending rate when it meets Dec. 11. Odds of a half-point cut rose to 8 percent today from 2 percent yesterday, while the likelihood of a reduction of any size remained 100 percent.

``If the Fed can be easy enough to keep us out of recession, the market will be higher one year forward,'' said Philip Orlando, chief equity market strategist at Federated Investors Inc. The firm manages $44 billion of stocks.

U.S. stocks extended an advance spurred yesterday when Citigroup received a $7.5 billion cash infusion and JPMorgan said Intel Corp. will benefit from ``robust'' computer demand. The S&P 500 hasn't risen two days in a row since Oct. 29.

The S&P 500 Financials Index dropped as much as 16 percent this month on concern that credit market losses will sap profit growth. The gauge on Nov. 26 traded at 10.6 times earnings, the lowest since at least 1995, data compiled by Bloomberg show.

Citigroup, the biggest gainer in the Dow average, added $1.97 to $32.29. The Wall Street Journal today reported that an investment banker this month suggested a merger with Bank of America Corp. The informal approach was dismissed by Citigroup and no talks took place, the paper said, citing a person familiar with the situation.

No Authorization

A Bank of America spokesman said the company hasn't authorized an approach by any investment banker to any company in the past six weeks, according to the Journal.

Bank of America rose $1.91 to $44.85. Lehman Brothers added $4.95 to $64.85. Financial stocks in the S&P 500 gained 5 percent, more than any other industry group and the most since October 2002. All 10 groups gained, including energy, even as the price of crude oil futures slid $3.80 to $90.62 a barrel, the lowest since Oct. 30.

``Just the suggestion there is value in these stocks that have been hit so bad will help the market,'' said Victor Pugliese, a managing director in equity sales at Broadpoint Capital Inc. in San Francisco.

Citigroup, the biggest U.S. bank, fell 38 percent from Oct. 12 to Nov. 26 and is the second-worst performer in the KBW Bank Index this quarter after Washington Mutual Inc. The worst U.S. housing slump since 1991 produced losses on mortgage-backed debt that made traditional investors unwilling to continue to provide financing for $300 billion of debt securities in so-called structured investment vehicles.

Hit Too Hard

``Names like Citigroup have been hit too hard,'' said Charles Bobrinskoy, vice chairman of Ariel Capital Management LLC in Chicago, which manages $15 billion including Citigroup shares. ``The core investment banking business is doing pretty well, so we think it's very, very cheap at these levels.''

Freddie Mac and Fannie Mae, the biggest providers of money for U.S. home loans, were two of the five biggest gainers in the S&P 500. Freddie Mac after the market closed yesterday said it plans to sell $6 billion in preferred stock and cut its dividend in half to shore up capital depleted by record mortgage defaults and foreclosures.

Freddie Mac gained $3.69, or 14 percent, to $29.42, the biggest percentage increase in its 19-year history as a public company. Fannie Mae rose $2.90, or 9.9 percent, to $32.30, after Morgan Stanley said the stock warrants a ``fresh look'' after falling 51 percent from its 2007 peak.

EBay, the world's biggest online auctioneer, increased $1.23 to $33.75. Amazon.com jumped $4.71 to $90.30. The companies may exceed Sanford C. Bernstein & Co.'s earnings estimates, the brokerage wrote.

``While fears of a less than happy holiday season could still be justified in traditional retail, we believe the momentum already apparent in online sales will result in a strong fourth quarter for both Amazon and EBay,'' New York-based analyst Jeffrey Lindsay wrote in a note to clients today.

American International Group Inc., the world's largest insurer, rose $3.23, or 5.9 percent, the most in more than two years, to $57.72 after Wachovia Corp. analyst John Hall said the company is worth 23 percent more than yesterday's closing price. The combined value of AIG's business units is $67 a share, Hall wrote yesterday after the close of regular trading.

New York Times Co., the third-largest U.S. newspaper publisher, fell 12 cents, to $16.71, an 11-year low, after Bank of America recommended investors sell shares because advertising sales will fall more than estimated in the industry next year.

The Russell 2000 Index, a benchmark for companies with a median market value of $604 million, gained 3.6 percent to 770.04. The Dow Jones Wilshire 500 Index, the broadest measure of U.S. shares, rose 2.9 percent to 14,816.83. Based on its advance, the value of stocks increased by $521.6 billion.

Amazon.com (AMZN US)
American International Group Inc. (AIG US)
Bank of America Corp. (BAC US)
Citigroup Inc. (C US)
EBay (EBAY US)
Fannie Mae (FNM US)
Freddie Mac (FRE US)
Lehman Brothers Holdings Inc. (LEH US)
New York Times Co. (NYT US)

To contact the reporter on this story: Elizabeth Stanton in New York at estanton@bloomberg.net.

Last Updated: November 28, 2007 16:51 EST