NEW YORK — A surprised Wall Street jumped at the Federal Reserve's historic decision to slash its target for a key interest to a record-low range and took comfort from the central bank's pledge to use "all available tools" to jump-start the economy.

Stocks already up more than 1 percent ahead of the announcement surged, sending the Dow Jones industrial average up more than 300 points. Demand for long-term government bonds increased and pushed yields to record lows. Wall Street was clearly caught off-guard by the Fed's decision to lower its target for the rate at which banks lend each other money to a range of zero to 0.25 percent.

Many analysts had expected the Fed to make a smaller cut to 0.5 percent from 1 percent. Establishing a range for its target was also unprecedented. The central bank also cut the lending rate for loans directly to banks.

The array of measures the Fed pointed to left Wall Street little room for doubt that the central bank will do what is necessary to help bring an end to the longest recession in a quarter-century.

"All in all, it's good news for stocks," said Jack A. Ablin, chief investment officer at Harris Private Bank. "It gave the market a little bit more than they expected."

The fact that the Fed targeted a range indicates that policy makers did not want to bring the rate all the way to zero, Ablin said. Such a move could have had problematic implications for money market funds, whose fees could then outpace yields.

The decision to target a range was "strange," Ablin said, but "that said, it definitely didn't surprise us to the downside in terms of target."

The Fed's statement said policy makers have other tools available — which means the Fed is saying that "we're pretty much out of dry powder on our primary weapon, but we've got other weapons available to combat deterioration in the economy," Ablin said.

"I inferred that rates are going to stay this low for a while."

The Dow Jones industrial average rose 329.11, or 3.84 percent, to 8,893.64 after having been up about 100 in subdued trading ahead of the move.

Broader stock indicators also rose. The Standard & Poor's 500 index advanced 37.75, or 4.35 percent, to 906.32, and the Nasdaq composite index rose 56.18, or 3.72 percent, to 1,564.52.

The Russell 2000 index of smaller companies rose 17.46, or 3.86 percent, to 470.03.

The Fed's moves appeared in part calculated to damp worries that the Fed had few tools left with which to prop up the economy.

President-elect Obama said Tuesday the Fed is "running out of the traditional ammunition" to combat the recession and that it was important that other government branches "step up."

Demand for government bonds surged. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 2.37 percent from 2.53 percent late Monday. The yield on the 30-year fell to a record low 2.88 from 2.99 percent late Monday.

Meanwhile, the yield on the popular three-month T-bill — whose yield has at times gone negative due to frenzied buying — was at 0.02 percent flat with late Monday.

The dollar was mixed against other major currencies, while gold prices rose.

Light, sweet crude fell 67 cents to $43.84 a barrel on the New York Mercantile Exchange.

The rate decision came on a day when investors received two more pieces of evidence on Tuesday that the economy was worsening: The Commerce Department reported a 18.9 percent drop in new home construction in November, while the Labor Department said consumer prices sank by 1.7 percent.

Richard E. Cripps, chief market strategist for Stifel Nicolaus, said the recent string of downbeat economic readings could eventually convince Wall Street that the economy has hit a bottom and could be poised for a modest recovery. In past downturns, the data remain weak long after the economy has began to recover.

"The idea is it's so bad that maybe it doesn't take much to go up from here," he said.

Wall Street remained nervous about the growing list of firms and individual investors affected by investment manager Bernard Madoff, who is accused of scamming investors.

Madoff, former chairman of the Nasdaq stock market, was arrested Thursday for orchestrating what prosecutors allege was a $50 billion Ponzi scheme to defraud investors. Firms invested in his fund include such major European banks as HSBC Holdings PLC, Banco Santander, BNP Paribas, and Royal Bank of Scotland Group PLC.

Markets overseas were mixed. Japan's Nikkei stock average fell 1.12 percent, while Hong Kong's Hang Seng index rose 0.55 percent. Britain's FTSE 100 rose 0.74 percent, Germany's DAX index rose 1.61 percent, and France's CAC-40 rose 2.07 percent.