* Stocks extend gains after Fed holds key rate steady
* Oil around $118 helps airlines, industrials
* Financials rally, led by AIG
* Dow up 2.5 pct, S&P 500 up 2.3 pct, Nasdaq up 2.3 pct
(Updates to late afternoon)
By Kristina Cooke
NEW YORK, Aug 5 (Reuters) - U.S. stocks rose sharply on
Tuesday as the price of oil tumbled and the Federal Reserve
held a key interest rate steady as expected and took a stance
on inflation that investors read as less likely to result in
any near-term rate hikes.
The Federal Open Market Committee said in its accompanying
statement that although it expected inflation to moderate later
this year and next, the outlook remained "highly uncertain."
The Fed offered few clues as to when it might push borrowing
costs higher.
Stocks rose after the decision, with the three major
indexes up more than 2 percent, extending an earlier rally
sparked by a tumble in the price of oil.
U.S. crude oil futures <CLc1> fell $2.62 to $118.79 a
barrel, easing some concerns about inflation and the impact of
higher fuel costs on consumer and business spending.
"The market seems to be reacting somewhat favorably to the
idea the Fed will not raise interest rates any time soon. It
appears that the Fed has actually taken a little more of a
dovish stance, speaking more about the downside risks to
growth," said Richard Sparks, senior equities analyst,
Schaeffer's Investment Research.
"They mentioned inflation, they talked about inflation
being highly uncertain, but it didn't seem like they dueled at
inflation as a potential problem as much as maybe they had in
the past."
Only one Fed policy-maker, Richard Fisher of the Dallas
Fed, dissented in favor of higher interest rates, surprising
some Fed watchers who had expected dissents from two other
officials.
The Dow Jones industrial average <> rose 286.10 points,
or 2.54 percent, to 11,570.25, while the Standard & Poor's 500
Index <.SPX> was up 28.91 points, or 2.31 percent, at 1,277.92.
The Nasdaq Composite Index <> was up 52.50 points, or 2.30
percent, at 2,338.06.
Investors snapped up shares broadly, with energy-sensitive
sectors particularly strong, including airlines and industrial
companies. Planemaker Boeing <BA.N> rose 7 percent to $65.63
and lifted the Dow industrials.
Financial shares also rose sharply, led by an 8.3 percent
gain in shares of insurer American International Group <AIG.N>.
The S&P financials sub-index <.GSPF> rose more than 4 percent.
Analysts at UBS upgraded AIG to "buy" from "neutral" on
valuation and said the world's largest insurer was
well-positioned to absorb further losses, without a need for an
equity raise.
Shares of Procter & Gamble Co <PG.N>, the world's largest
consumer products maker whose products range from Pampers
diapers to Olay skin-care products, rose after the company
posted a stronger-than-expected quarterly profit. Shares rose
3.2 percent to $67.94.
Data from the Institute for Supply Management showing the
U.S. service sector shrank less than expected in July also
helped fuel the positive mood. The ISM report included a
decline in the prices paid index. For details, see
[].
(Additional reporting by Ellis Mnyandu; Editing by Leslie
Adler)
