Updated from 4:03 p.m. EDT

Stocks staged a startling rally Wednesday, reversing earlier losses and climbing fast after a Federal Reserve report showed stregnth in the post-Katrina economy.

The Dow Jones Industrial Average surged 128.87 points, or 1.25%, to 10,414.13, the best single-session point gain since Sept. 6. The index traded as low as 10,233 earlier. Meanwhile, the S&P 500 gained 17.62 points, or 1.5%, to 1195.76, and the Nasdaq Composite rallied 35.24 points, or 1.71%, at 2091.24.

Gains were paced by shares of banks and chain stores, two sectors where anxiety ran high in Katrina's aftermath. The S&P Retail Index jumped 2.7% on the session, while the Philadelphia Stock Exchange bank index rose 2%.

With the S&P 500 down 4.1% on the month and the Nasdaq off 4.4%, analysts said a bounce was due.

"The selloff has been overdone, so any good news helps push us higher," said Edgar Peters, chief investment officer with Pan Agora. "People were happy with the beige book news that the effects of the hurricanes only really were in the Gulf Coast area. Everyone is starting to relax a little. The result was a relief rally with nothing really serious driving it."

About 1.97 billion shares traded on the New York Stock Exchange, with advancers beating decliners by a 10-to-7 margin. Trading volume on the Nasdaq was 1.91 billion shares, with advancers outpacing decliners 3 to 2.

The 10-year Treasury bond rose 2/32 in price to yield 4.46%, while the dollar was lower against the yen and euro.

The market found its legs after the Fed's beige book report showed the economy continued to expand in September despite the headwinds created by hurricanes Katrina and Rita. All districts reported a pickup in cost pressures from higher energy costs, but employment continued to rise.

"Overall, considering what the country has been through this past summer, this was generally upbeat," said Micheal Sheldon, chief market strategist with Spencer Clarke.

Stocks also were boosted by the Energy Department's strong inventory data for the week ended Oct. 14. Crude inventories rose 5.6 million barrels, while gasoline inventories added 2.9 million barrels; distillate stocks fell by 1.9 million barrels.

On the Nymex, crude for November delivery fell 79 cents to close at $62.41 a barrel. The inventory data helped alleviate concerns about Hurricane Wilma, which strengthened to Category 5 status but was tracking away from Gulf of Mexico energy infrastructure.

Earnings from Dow components Altria ( MO), J.P. Morgan ( JPM) and Honeywell ( HON) also helped to relieve the early pressure.

A weak spot was Intel ( INTC), which saw third-quarter earnings rise 5% from a year ago to $2 billion, or 32 cents a share, on an 18% jump in revenue to $9.96 billion. Two special items complicated the comparison with Wall Street estimates, but the top line was about $40 million ahead of forecasts. Intel reported a solid gross margin of 61.1% before charges in the quarter.

Looking ahead, Intel sees fourth-quarter revenue of $10.2 billion to $10.8 billion. Analysts were expecting $10.7 billion. The company cited a $100 million inventory buildup in the third quarter but still bumped up its margin forecast to about 63% for the current period. Intel was off 3 cents, or 0.1%, to finish at $23.69.

The news was better at Motorola ( MOT), where brisk sales of its popular cell phones continued to drive profit growth. Third-quarter earnings more than tripled to $1.75 billion, or 69 cents a share, including investment gains.

Motorola earned 30 cents a share before items, beating estimates by 2 cents. Revenue rose 26% to $9.42 billion, about $300 million ahead of forecasts. The company pegged fourth-quarter earnings at 33 cents on sales of $10.4 billion. Analysts expected 33 cents a share on $10 billion. The stock rose 85 cents, or 4.2%, to $21.02.

Yahoo! ( YHOO) also reported a strong quarterly profit of $254 million, or 17 cents a share, on a 42% jump in revenue to $932 million. Analysts were forecasting earnings of 14 cents a share on revenue of $918 million.

The Internet giant, which benefitted from a strong market for branded advertising, reaffirmed fourth-quarter guidance for operating income before depreciation and amortization of $477 million on net revenue of $1.06 billion. The stock was up $2.21, or 6.6%, to close at $35.91. Google ( GOOG) shares also gained, finishing up $5.42, or 1.8%, to $308.70.

Altria was another one of the companies in the spotlight. The cigarette maker posted a third-quarter profit of $2.9 billion, or $1.38 a share, up from $2.6 billion, or $1.28 a share, a year earlier. Analysts were expecting EPS of $1.33, according to Thomson First Call. Revenue climbed 10.4% to $24.96 billion from a year ago.

Looking ahead, Altria expects full-year earnings of $5.05 to $5.10 a share, compared with analysts' expectations for full-year EPS of $5.09. Altria added $1.37, or 1.9%, to $73.85.

Honeywell reported third-quarter net income of $470 million, or 55 cents a share, rising from $372 million, or 43 cents a share, a year ago. The average analyst estimate was for earnings of 53 cents a share. Sales rose 8% to $6.9 billion from last year. Honeywell also forecast that 2005 earnings, excluding taxes linked to the repatriation of foreign earnings, will be between $2.11 and $2.13 a share. Honeywell was lower by $1.88, or 5.2%, to $34.05.

J.P. Morgan had third-quarter earnings of $2.5 billion, or 71 cents a share, up from $1.42 billion, or 39 cents a share, a year ago. Results included a charge of 7 cents share for Hurricane Katrina. Excluding charges totaling $221 million for the merger with Bank One, earnings reached 75 cents a share. Analysts expected 72 cents. Revenue increased 15% to $15.55 billion from a year ago. J.P. Morgan gained 96 cents, or 2.8%, to $34.73.

Eastman Kodak ( EK) swung to a third-quarter loss of $1.03 billion, or $3.58 a share, after earning $458 million, or $1.60 a share, a year ago. Results included a $3.13-a-share charge related to deferred tax assets, as well as a 1-cent gain from discontinued operations. Revenue rose 5% to $3.55 billion from a year ago. The Thomson First Call consensus was for earnings of 66 cents a share on revenue of $3.69 billion. Kodak lost $1.08, or 4.7%, to $22.06.

After the closing bell, eBay ( EBAY) posted third-quarter earnings of $255 million, or 18 cents a share, up from $182 million, or 13 cents a share, a year ago. Excluding charges, the online auction site posted a profit of 20 cents a share, in line with analysts' expectations, according to Thomson First Call. Sales rose 37% to $1.1 billion, ahead of forecasts. eBay finished Wednesday's session up $1.59, or 3.9%, to $42.01, but was falling by 6% in the after-hours session.

Amgen ( AMGN) and E*Trade ( ET) results are also expected late Wednesday.

Thursday will bring earnings reports from Ford ( F), McDonald's ( MCD), Eli Lilly ( LLY), Pfizer ( PFE) and Coca-Cola ( KO).

On the economic front, the Census Bureau said new housing starts rose 3.4% in September to an annualized rate of 2.108 million, the highest level since February. Economists had expected housing starts to reach an annualized rated of 1.970 million. Building permits rose 2.4% in September.

The data were released as Banc of America was cutting its view on the homebuilding sector to cautious and downgrading multiple stocks. The firm lowered its ratings on Hovnanian ( HOV), NVR ( NVR), M.D.C. ( MDC), Ryland ( RYL) and Toll Brothers ( TOL) and reduced the stock-price target for each.

Speaking late Tuesday in Trenton, N.J., on his economic outlook, Fed Vice Chairman Roger Ferguson issued another central bank warning about the inflationary concerns posed by high energy prices. He said that although short-run swings in companies' energy costs "might be absorbed in their profit margins, a persistent increase is likely to be fully passed on to the consumer."

Ferguson also said he believes "that our policy of removing monetary accommodation at a 'measured' pace is most likely to promote our broader objectives of price stability and maximum sustainable economic growth."

Separately, Fed Governor Donald Kohn spoke in Pittsburgh about his 2006 economic outlook, and he continued the recent spate of comments that signal more rate hikes are coming.

"Obviously, we are considerably closer to where policy needs to be than we were 16 months ago, but we are not yet at a point where we can stop and watch the economy evolve for a while," he said.

Elsewhere, during a speech in Columbus, Ohio, Cleveland Fed President Sandra Pianalto said she believes "removing the remaining monetary policy accommodation puts us in the strongest possible position to react as evolving economic conditions require."

"While the Federal Reserve is talking tough, the markets are becoming increasingly concerned that the inflation genie may already be out of the bottle," said Paul Mendelsohn, chief investment strategist with Windham Financial. "In addition, the uncertainty associated with the changing of the guard at the Fed in January is beginning to creep in to the markets."

Among the day's ratings changes, Bear Stearns downgraded Seagate Technology ( STX) to underperform from peer perform, citing concerns about weakening industry conditions. Shares of the disk-drive maker fell by 35 cents, or 2.3%, to $14.70.

UBS cut its rating for SanDisk ( SNDK) to reduce from neutral, saying the stock is trading at levels that reflect too much optimism for the maker of computer-storage devices. SanDisk was down $1.70, or 3.5%, to close at $47.56.

Overseas markets were sharply lower, reflecting Intel and hawkish comments Tuesday from Fed Governor Janet Yellen. She said the "neutral" level for fed funds is 3.5% to 5.5%. With the funds rate currently at 3.75%, that strongly suggests the overnight bank lending rate is about to increase.

London's FTSE 100 was down 1.8% to 5167 while Germany's Xetra DAX lost 2.1% to 4845. In Asia, Japan's Nikkei fell 1.7% overnight to 13,129 while Hong Kong's Hang Seng lost 1.5% to 14,373.

To view Gregg Greenberg's video take on today's market, click here .