The Dow Jones Industrial Average rallied 233.30 points or 1.82 per cent to 13,079.08 and the Nasdaq surged 53.96 points or 2.20 per cent to 2,505.03, according to final figures.
The broad-market Standard & Poor's 500 rose 34.67 points or 2.46 per cent to 1,445.94.
It was the first time the blue-chip Dow has closed higher in seven sessions.
An hour before the stock market opened, the Federal Reserve slashed by a half-percentage point the discount rate - short-term interest rate on loans to commercial banks - to 5.75 per cent.
However, the central bank left its key federal funds rate, which affects the broader economy, at 5.25 per cent, where it has been since June 2006.
'We think this is a very positive step by the Fed and shows it is very much on top of the problem,' said Mr Al Goldman, chief market strategist at AG Ewards.
'Market reaction will show us if this step is enough to substantially reduce fears and bring back buyers.'
AFP