U.S. stocks rally on bailout hope

By Herbert Lash

NEW YORK (Reuters) - The dollar surged and U.S. stocks jumped on Tuesday, recouping more than half the losses sustained from Wall Street's worst day in 20 years, on growing optimism Washington will find a way to rescue troubled banks.

In sign U.S. authorities are working to slow the heavy losses banks have taken on hard-to-price assets, regulators will provide guidance that will not use fire-sale prices to evaluate those assets, a document obtained by Reuters said.

In another encouraging sign for investors who suffered on Monday the biggest plunge on Wall Street since October 1987, President George W. Bush and lawmakers were working to revive a bill that sparked a steep sell-off after Congress rejected it.

The broad S&P 500 gained more than 5 percent, while the Nasdaq and Dow rose slightly less on the news. Monday's crash buzzed almost 9 percent off the S&P, and the two other indexes suffered nearly as much.

Oil rose more than $4 to rise over $100 a barrel on expectations a new financial stability plan would pass, while gold fell, weighed down by the rally in stocks and the dollar.

The stock rally spurred an unwinding of safe-haven bidding for U.S. government debt, pushing bond prices sharply lower.

The dollar jumped 2 percent against the yen and 3 percent against the Swiss franc at one point as cautious optimism built that Congress will eventually approve a $700 billion (388 billion pound) plan to bail out banks holding tainted assets.

Strong readings on U.S. consumer confidence and a measure of manufacturing activity in the U.S. Midwest also boosted equities and further curbed the appeal of debt. The two September reports tempered fears about the economy's health.