Wall Street: Wednesday close

PANIC selling became panic buying as Wall Street witnessed its biggest one-day rally in 15 years, but investors' new-found exuberance could be tested by news of yet another official accounting investigation.

The Dow Jones Industrial Average executed a 660-point U-turn to close up 488.95 points or 6.4% to 8191.29, while the Nasdaq Index soared 61.20 points or 5% to 1290.25.

The day's gains were the biggest since the rebound from the crash of 1987. The Dow's point gain was the second largest to date.

The buying binge came before media AOL Time Warner became the latest corporate giant to disclose that its books had come under scrutiny by the watchdog Securities and Exchange Commission. Media reports last week suggested that AOL had used 'unconventional accounting' in arriving at income at its struggling online subsidiary. AOL shares, which closed in regular trading down 15 cents or 1.3% at $11.40 dropped another 9% after hours.

Analysts said the selling that had pushed some major indices to five-year lows on Tuesday close had peaked early in the latest session. Factors including official action from Washington 'turned psychology on a dime,' according to one trader. 'One minute there were only sell orders and then, wham, everything flipped over to the other extreme.'

Michelle Clayman, chief investment strategist at New Amsterdam Partners, said: 'The run-up is probably due to a number of factors. We've had a string of horrible days and are probably due for a short-term rally.'

Analysts also cited rumours that the Federal Reserve's rate-setting committee was in an emergency meeting and confirmation that US Treasury Secretary Paul O'Neill had cancelled a visit to South America.

The developments, taken together with talk that the Bank of England was ready to lower interest rates, fed suggestions that an international effort was under way to halt a slide in share prices which could have knocked the global economy.

The Fed's official response to the rumours was a 'no comment,' but trade in Fed funds rate futures reflected a 76% chance that Greenspan and his colleagues would cut rates by a quarter of 1% to 1.50% before the end of August and a 12% probability that the rate reduction would come by 1 August, according to market participants.

The Federal Open Market Committee, which sets rate policy, is not due to meet formally until 13 August, but it can cut rates in an emergency at any time. Chances of a rate cut have risen, economists say, as the danger to the economy has increased. A drop in retail sales last week could be a catalyst for the Fed to intervene on concerns that declining consumer spending could drive the economy back into recession.

The rate cut theory fed into a sudden reversal in beaten down bank shares. Citigroup recovered from an early decline to 1998 levels to trade up $2.59 or 10% to $29.59. JP Morgan Chase rebounded off 1995 lows, surging $3.22 or 16% to $23.30 after it sought to reassure investors that it acted properly in advising collapsed energy trader Enron.

The banks took a battering during Congressional hearings on allegations, denied by the banks, that they helped Enron book loans as income.

Official help from Washington came in an agreement between House and Senate negotiators to approve a bill designed to punish corporate fraud and reform the accounting industry.

TV footage of former officers of Adelphia, once America's sixth biggest cable TV company, in handcuffs reminded investors of the crackdown on corporate corruption. John Rigas, Adelphia founder and former chairman and chief executive, and two of his sons were among five people arrested for defrauding the company in what prosecutors said was 'systematic' fraud which led to $60bn in shareholder losses. Adelphia filed for bankruptcy last month.

The rally lifted many sectors. Winners included Microsoft, which leapt $3.22 or 7.5% to $46.23, chemical giant DuPont, up $3.23 or 9% to $40.28 and consumer products company 3M, higher by $7.95 or 7% to $119.71.

Quarterly company reports were also a feature. Wireless company AT&T Wireless shed 40 cents or 8% to $4.95 after it said customer sign-ups were slowing. Online retailer Amazon.com slumped 45 cents or 3% to $14.10 after it said its results would be hurt by a move to offer free shipment to customers in an effort to boost business.

Martha Stewart Living dropped 95 cents or 10% to $9.05, down from $20.95 a year ago, on word that the alleged involvement of its founder - a national celebrity in the US - in an insider share trading scheme could hurt its multi-media and product endorsement business.

James Follo, the company's chief financial officer, said: 'We have begun to see some impact on our business resulting from the uncertainty relating to the investigations of Martha Stewart's stock sale. Since those investigations are still pending, our ability to provide accurate guidance is constrained.'