NEW YORK — The stock market surged Wednesday for a second consecutive session after a top-ranking Federal Reserve official indicated that policy-makers could be amenable to lowering short-term interest rates further.

NEW YORK — The stock market surged Wednesday for a second consecutive session after a top-ranking Federal Reserve official indicated that policy-makers could be amenable to lowering short-term interest rates further.

Battered financial shares led the rally. The Dow Jones industrial average rocketed 331.01 points, or 2.6 percent, to 13,289.45 — its largest one-day advance since it jumped 335.97 points Sept. 18, the day of the Fed's first rate cut following the summer market upheaval tied to the financial system's woes.

The Standard & Poor's 500 index rose 40.79 points, or 2.9 percent, to 1,469.02, and the NASDAQ composite soared 82.11 points, or 3.2 percent, to 2,662.91.

In a speech in New York, Fed Vice Chairman Donald L. Kohn said the central bank would remain "flexible" and would "act as needed" to prevent the housing crisis and credit crunch from damaging the economy.

Following a string of recent comments from Fed officials that they would stand pat, investors embraced Kohn's remarks as a sign that policy-makers were reassessing recent signs of economic softness and could cut rates at their Dec. 11 meeting. That would be the third consecutive Fed reduction, following cuts Sept. 18 and Oct. 31.

But many analysts say the market was primed for at least a short-term rebound because sentiment had become so gloomy — a contrarian indicator that often has preceded sharp advances. Amid rising mortgage-related losses at banks and other financial companies, key stock indexes Monday were down more than 10 percent from their recent peaks, the first official market "correction" in more than four years.

"It was as negative in terms of emotion as I've ever seen," said Bill Buechler, president of Buechler Capital Asset Management in La Jolla, Calif. "When emotion takes over in the marketplace, it's either a top or a bottom, a time to sell or to buy."

A steep drop in oil prices also helped the mood Wednesday. Crude futures fell $3.80 to $90.62 a barrel in New York on expectations that major oil exporters will increase production to keep prices from topping the $100 mark.

Investors ignored more downbeat news on the economy. Sales of existing homes slid 1.2 percent in October, the National Association of Realtors said. And orders for big-ticket "durable" goods fell for a third consecutive month in October, the government said.

Some stock market analysts believe that the major averages will continue rebounding in coming days as investors who had been on the sidelines rush in to avoid missing a year-end rally. On Tuesday, the Dow rose 215 points, the S&P 500 rose 21 and the NASDAQ composite jumped nearly 40.

With Wednesday's gains key indexes are merely back to their levels of two weeks ago.

Stock purchases by traders who had "shorted" the market, betting on lower prices, could help sustain the rally. In a short sale a trader borrows stock and sells it, betting the market price will drop. To close out the bet the trader must eventually buy shares to replace the loaned stock.

Among depressed financial stocks — which have been heavily shorted in recent months — Citigroup was up $1.97, or 6.5 percent, to $32.29. Merrill Lynch & Co. jumped $4.72, or 8.9 percent, to $57.79.

But struggling lender Countrywide Financial fell 25 cents, or 2.8 percent, to $8.72.