Updated from 4:07 p.m. EDT

Stocks rallied Thursday after the

Federal Reserve

said two years of interest rate hikes are finally slowing down the economy.

The

Dow Jones Industrial Average

surged 217.24 points, or 1.98%, to 11,190.80, its best single-session point gain since March 2003. The

S&P 500

was up 26.87 points, or 2.16%, to 1272.87, and the

Nasdaq Composite

skyrocketed 2.96%, gaining 62.54 points to 2174.38.

Just after 2 p.m. EDT, the Federal Open Market Committee decided to raise its target for the federal funds rate by 25 basis points to 5.25%. Going back to June 2004, policymakers have lifted rates by a quarter-point at every one of their last 17 meetings.

Along with the rate increase, the FOMC said in a statement that recent indicators "suggest that economic growth is moderating from its quite strong pace earlier this year," but noted that readings on core inflation "have been elevated in recent months" and "that some inflation risks remain."

One key change in the language of the statement, always parsed by investors, was that the FOMC appeared to temper its views on the possibility of further hikes.

"The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information," policymakers said. In May, the committee said "some further policy firming may yet be needed," a comment that didn't appear in the latest statement.

"This statement is being well-received because it's in line with what the market expected," said Robert Pavlik, chief investment officer with Oaktree Asset Management. "The statement leaves open the possibility of another rate hike, so it was just hawkish enough. People may just be relieved that it's finally over, and we can look toward second-quarter results."

All of the Dow's 30 components ended higher. The Dow's best performer was

McDonald's

(MCD) - Get Report

after Merrill Lynch upgraded the restaurant chain to buy from neutral, citing potentially higher sales and margins. The firm expects the company to continue posting strong same-store sales growth in the U.S. McDonald's finished up $1.59, or 5%, to $33.56.

Components

Alcoa

(AA) - Get Report

,

American Express

(AXP) - Get Report

,

Intel

(INTC) - Get Report

,

JPMorgan Chase

(JPM) - Get Report

and

United Technologies

(UTX) - Get Report

also finished with gains of 3% or more.

"We've been betting on an upside move, due to the oversold condition and the seasonal timing," said Marc Pado, U.S. market strategist with Cantor Fitzgerald. "The lack of success in seeing good rotation, breadth, and leadership has me a bit concerned about the short term. Between the Federal Open Market Committee meeting and the end of the quarter, there is no question that the market will move out of this range."

The 10-year Treasury bond was up 10/32 in price to yield 5.20%, while the dollar fell against the yen and euro.

About 1.89 billion shares changed hands on the

New York Stock Exchange

, with advancers outpacing decliners by a 5-to-1 margin. Volume on the Nasdaq was 2.21 billion, with advancers beating decliners 4 to 1.

Also Thursday, the Commerce Department released its third and final report on first-quarter gross domestic product. GDP growth was revised upward to 5.6% from the 5.3% reported previously, falling in line with estimates. Growth ran at a 1.7% rate in the fourth quarter of 2005.

"This number just shows that there was no slowdown in economic activity during that period," said Edgar Peters, chief investment officer with Pan Agora. "This confirms that instead of tightening, the Fed has only brought the fed funds rate to a neutral level. It's still possible the Fed may pause in August, but that won't mean they'll stop rate hikes."

To view Kara Wetzel's video take on today's market, click here

.

In addition, the Labor Department said initial jobless claims rose by 4,000 to 313,000 last week. The less volatile four-week average fell by 6,000 to 305,500, its lowest level since February.

Commodity prices also rose, with August crude spiking $1.33 to close at $73.52 a barrel. Gold rose $7.90 to $588.90 an ounce, silver tacked on 18 cents to $10.33 an ounce, and copper rose 13 cents to $3.32 a pound.

On Wednesday, strength in

General Motors

(GM) - Get Report

, Intel, and

Exxon Mobil

(XOM) - Get Report

helped the Dow to a 49-point gain, leaving the average at 10,974. The S&P 500 rose 7 points to 1246, while the Nasdaq added 12 points to 2112.

"The movement we were seeing out of recent losers and into winners was clearly a factor of window-dressing," Pado said, referring to mutual fund managers' supposed habit of loading up gainers at the end of a quarter. "For instance, homebuilders, networking and semiconductors were down, and basic materials, energy and consumer staples were higher" on Wednesday, he said.

In corporate news,

Tenet Healthcare

(THC) - Get Report

said it will pay the Justice Department $725 million over four years to settle allegations it overcharged the government Medicare program earlier in the decade. The company expects to take a charge in the second quarter. Tenet fell 13 cents, or 1.8%, to $7.10.

Following Tenet's announcement, the NYSE Healthcare index was higher by 2%, and the S&P Healthcare index rose 1.7%. Elsewhere, the Amex Gold Bugs index finished up 7.8%, the Philadelphia Oil Service Sector index gained 4.3%, and the Philadelphia Semiconductor Sector index was higher by 4%.

ATI Technologies

(ATYT)

reported fiscal third-quarter earnings of $31.9 million, or 12 cents a share, reversing a loss of $445,000 last year. On an adjusted basis, the company earned 16 cents a share, a penny above estimates. However, the graphics chipmaker offered fourth-quarter revenue guidance below the Thomson First Call consensus. Shares plummeted $1.85, or 11.9%, to $13.65.

General Mills

(GIS) - Get Report

finished higher after the cereal maker posted fiscal fourth-quarter earnings of $222 million, or 61 cents a share. Although results were down 52% from a year ago, they matched the Thomson First Call average estimate. Sales were up 5% to $2.8 billion from a year ago. General Mills rose 29 cents, or 0.6%, to $51.75.

After the bell Thursday, both

Research In Motion

(RIMM)

and

Palm

(PALM)

will report earnings.

Overseas markets were uniformly higher, with London's FTSE 100 adding 2% to 5791 and Germany's Xetra DAX gaining 2.3% to 5582. In Asia, Japan's Nikkei surged 1.6% overnight to 15,121, and Hong Kong's Hang Seng gained 0.8% to 15,865.