(Recasts, adds markets, PIMCO executive comment, background)

By Mark Felsenthal and Alister Bull

WASHINGTON, April 29 (Reuters) - The Federal Reserve said on Wednesday the outlook for the U.S. economy had improved a bit in recent weeks but that low interest rates would be needed for some time to ensure it recovers from its deep recession.

Wrapping up a two-day policy meeting, the U.S. central bank said it had decided to hold benchmark overnight interest rates in the range of zero to 0.25 percent reached in December even as officials took stock of some recent hopeful economic signs.

"Although the economic outlook has improved modestly since the March meeting, partly reflecting some easing of financial market conditions, economic activity is likely to remain weak for a time," the Fed said in a statement.

"The economy has continued to contract, though the pace of contraction appears to be somewhat slower," it said.

Stocks shot higher and government bond prices sank as the Fed's announcement added to a sense of light at the end of the tunnel. The dollar rose against the yen but lost ground to the euro as investors' appetite for risk increased, easing demand for both the dollar and the yen as a safe haven.

"The economy has gone from being in a freefall and is now on the road to recovery," said Mark Vitner, an economist for Wachovia Securities in Charlotte, North Carolina.

After their last meeting on March 17-18, Fed officials had offered no hint the recession was abating and they announced plans to pump an additional $1.15 trillion into the economy.