Bank stocks and the broader markets rallied Wednesday on reports that the Obama administration is considering creation of a "bad bank" to buy toxic assets from the nation's embattled lenders.

The KBW Bank Index rose 14.4%, the Dow Jones industrial average gained 2.46%, and the Standard & Poor's 500 index posted a 4.2% increase.

Trish Pines, a trader at FIG Partners LLC, said the big driver in Wednesday's rally was "definitely" the Obama administration's bad-bank thinking. "It gives the market some light at the end of the tunnel that some of the bad investments will be absorbed and things will start to improve."

Also on Wednesday the Federal Reserve's Open Market Committee said it would leave the federal funds rate unchanged in a range of zero to 0.25%.

Scott A. Anderson, a senior economist at Wells Fargo & Co., wrote in a note Wednesday that the committee's promise to keep the fed funds target rate at its "exceptionally" low level "for some time" acknowledges that the economy has worsened since December.

"Expect further expansion and utilization of the Fed's existing credit facilities, as well as the addition of new ones in 2009 as the Fed moves further down the path of 'credit easing,' " Mr. Anderson wrote.

Gainers included Wells, which soared 31% despite reporting a significant fourth-quarter loss. Analysts, however, said it was unclear whether Wells' shares were pushed higher by its own news or speculation about the next stage of the bailout. (See related story.)

Gains were widespread. JPMorgan Chase & Co. rose 10.4%; Citigroup Inc., 18.6%; Bank of America Corp., 13.7%; U.S. Bancorp, 11.6%; and Bank of New York Mellon Corp., 13.7%.

Regional banking companies also rose. PNC Financial Services Group Inc. gained 16.1%; Regions Financial Corp., 11.8%; M&T Bank Corp., 11.4%; City National Corp., 11.3%; and Zions Bancorp., 27.6%.

Cullen/Frost Bankers Inc. rose 13.5%. The $15 billion-asset San Antonio company said its fourth-quarter net income fell 3%, to $53 million, or 89 cents a share, two cents above analysts' average estimate. (See related story.)

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