NEW YORK (Bloomberg) - US stocks rallied the most in two months on speculation lower borrowing costs and a plan to bail out bond insurers will restore confidence in the financial system.

Citigroup Inc., JPMorgan Chase & Co. and Bank of America Corp., the largest US banks, helped the Dow Jones Industrial Average erase a 326-point loss and sparked the biggest advance in financial shares in five years. Centex Corp. and DR Horton Inc. led a gauge of homebuilders to its steepest gain since at least 1994 on expectations the Federal Reserve's surprise 0.75 percentage point rate cut yesterday will spur construction.

The Standard & Poor's 500 Index added 28.08, or 2.1 percent, to 1,338.58, its first advance in six days. The Dow average rose 298.98, or 2.5 percent, to 12,270.17, marking a gain of 625 points from its lows of the day. The Nasdaq Composite Index increased 24.14, or 1.1 percent, to 2,316.41.

"The bond insurers scare people to death," said Harry Clark, who oversees about $1.3 billion as CEO of Clark Capital Management in Philadelphia. "It's big sighs of relief around Wall Street and that's fueling a rally."

Ambac Financial Group Inc. and MBIA Inc., the two largest US bond insurers, posted the biggest gains in the S&P 500 after New York State regulators met with banks to discuss raising new capital for the insurers. Benchmark indexes posted a rally in the final hour of trading that erased declines spurred by forecasts of slowing sales at Apple Inc. and Motorola Inc.

JPMorgan increased $4.86, or 12 percent, to $45.72, its steepest gain since 2002. Bank of America added $3.18, or 8.5 percent, to $40.57, its biggest rally in eight years. Citigroup advanced the most since October 2002, climbing $1.96 to $26.36. Bear Stearns Cos. recommended investors buy shares of large banks, which historically have outperformed during periods of aggressive Fed rate cuts.

New capital may help preserve the top credit ratings for the bond guarantors such as MBIA, the industry's largest, and boost investor confidence in the $2 trillion of assets they guarantee.

Ambac Financial, MBIA's biggest rival, lost its AAA grade from Fitch Ratings this month on concern about rising defaults tied to sub-prime mortgages.

Ambac rallied $5.73, or 72 percent, to $13.70. MBIA increased $4.08, or 33 percent, to $16.61.

Financial shares in the S&P 500, which lost 21 percent last year as the sub-prime mortgage market collapsed, gained 6.8 percent yesterday for their biggest advance since October 2002.

The Fed's latest rate cut "is delivering free money to banks," said Wayne Wilbanks, who manages about $1.2 billion at Wilbanks Smith & Thomas Asset Management in Norfolk, Virginia. "If you look at any of these financials, they are blown-out-of- the-water oversold."

Centex, the third-largest homebuilder by revenue, climbed $4.55, or 20 percent, to $27.22. DR Horton, the fourth-biggest, added $1.55, or 12 percent, to $14.45.

A gauge of homebuilders in S&P indexes climbed 15 percent, its biggest gain since Bloomberg began tracking the data in 1994, as all 15 of its members advanced.

Tyco International Ltd. climbed $2.68, or 8 percent, to $36.40. The world's biggest maker of security and fire systems raised its 2008 forecast on higher sales at its ADT and valve units and said first-quarter revenue and margins topped previous projections.

United Technologies Corp. climbed $3.74, or 5.6 percent, to $70.98 for the biggest rise since April 2006. The maker of Otis elevators, Pratt & Whitney jet engines and Sikorsky helicopters said fourth-quarter profit rose 23 percent as it benefited from overseas demand for aircraft parts and elevators.

EBay Inc. advanced $1.81, or 6.7 percent, to $28.94. The largest Internet auction site gave up all of those gains in extended trading after forecasting 2008 sales and profit that trailed some analysts' estimates.

Despite yesterday's gains, the S&P 500 is still down 8.9 percent in 2008 and the Dow is 7.5 percent lower on concern that fallout from the collapse of the subprime mortgage market will drag the economy into a recession.

The Nasdaq Composite, which has retreated 13 percent this year, has tumbled 19 percent from its almost seven-year peak last October. The Dow average has dropped 13 percent from its October 9 record and the S&P 500 has decreased 14 percent from its all-time high on the same day.

Global concern about an economic slowdown has sent 46 of the world's 68 markets with at least $10 billion in value into so-called bear markets, which are marked by declines of at least 20 percent.

Apple lost $16.64, or 11 percent, to $139, its biggest tumble since July 2002. CEO Steve Jobs spooked investors by failing to meet the most optimistic projections for first-quarter profit and forecasting slower sales growth. IPod sales were little changed in the US, signaling that demand for consumer electronics is waning.

UBS AG and Bank of America Corp. lowered their price estimates on the stock.

Motorola retreated $2.31, or 19 percent, to $10.01 in its biggest loss since 2002. The company forecast a loss for the first quarter after posting an 84 percent drop in fourth-quarter profit as customers fled to phones made by competitors. Fourth- quarter net income fell to $100 million, or four cents a share, while sales declined 18 percent to $9.65 billion.

"Worldwide we're seeing concern about consumer spending, particularly US consumer spending, and these guys are in the crosshairs of that," Doug Peta, market strategist at J&W Seligman & Co. in New York, said of Apple and Motorola. Seligman manages $20 billion.

The S&P 500 fell as much as 3.1 percent before the last-hour rally and all 10 industry groups posted declines at some point during the day. Only two industries, technology and health-care, ended the day lower.

The Chicago Board Options Exchange Volatility Index, or VIX, climbed as much as 11 percent to the highest intraday level since October 9, 2002, when the S&P 500 reached the lowest point of its last bear market decline. Almost three stocks closed higher for every one that fell on the New York Stock Exchange.

Google Inc. slumped $35.73, or 6.1 percent, to $548.62 for the biggest decline since February 2006. UBS AG said it was "cautious" on the company's fourth-quarter earnings and sees little reason for sales to top its projection of 14.7 percent growth. Google is scheduled to report results after markets close on January 31.

Analysts estimate fourth-quarter earnings at S&P 500 companies declined 17 percent from a year earlier, according to data compiled by Bloomberg as of January 18. A week earlier, estimates pointed to a year-on-year drop of 10 percent. As recently as November 30, S&P 500 earnings were expected to increase.

Freeport-McMoRan Copper & Gold Inc., the world's second-biggest copper miner, declined $4.22 to $77.30 after fourth- quarter profit fell 2.8 percent on increased costs associated with its acquisition of Phelps Dodge Corp.