Stocks rallied late Tuesday after the Federal Reserve slashed its key interest rates by a half percentage point in an attempt to counter any further damage to the U.S. economy.

The Dow Jones industrial average added 113.76 points, or 1.29 percent, to 8,950.59, while the technology-heavy Nasdaq Composite index gained 11.86 points, or 0.80 percent, to 1,492.32. The broader Standard & Poor's 500 index rose 12.78 points, or 1.23 percent, to 1,051.33.

The Fed's decision brought the federal funds rate to 2.5 percent — a 39-year-low — from 3 percent.

"It's positive news, certainly for the part of the economy that is interest-rate sensitive and also because it will put more money in consumers' pockets,'' said Rick Meckler, president of investment firm LibertyView, which manages $5 billion. "The market still faces the overhang of whatever the U.S. is going to do in retaliation. But until that happens, most everything else is lining up for a slightly improved market.''

Lower interest rates help companies and consumers by spurring spending and investments. But investors' fears over escalating violence, sliding profits and the weakening economy are overshadowing the Fed's easing campaign and casting doubt on the day's modest rally. 

"Those three issues overshadow the positive effects of the continued Fed rate cutting,'' said Erik Gustafson, portfolio manager at Stein Roe & Farnham, which oversees $22 billion. "We have a crisis in confidence right now, and until that confidence is rebuilt, until we see a lower level of fear, the markets are going to continue to struggle.''

Fund managers said a half-point cut had largely been factored into stocks and would not spark a sustained rally or prove a speedy remedy for falling corporate profits. This year's rate cuts have done little so far to stop the wrenching slide in stocks, which hit new three-year lows last month.

Technology shares were little changed despite a warning by Compaq Computer Corp. that the weakening economy would push the computer maker into a quarterly loss. Compaq's forecast highlighted Corporate America's sliding earnings, which are expected to tumble more than 20 percent in the third quarter, making it the worst quarter in a decade.

Earnings tracking firm Thomson Financial/First Call said earnings for the S&P 500 companies are still expected to grow 8.9 percent in the final quarter and by 2.9 percent in the first quarter of 2002.

Compaq slipped 17 cents to $8.16, ranking as the most active on the New York Stock Exchange. The No. 2 personal computer maker said the weak economy, its own merger plans with Hewlett-Packard Co. and the chaos following the attacks three weeks ago converged to form "the perfect storm" with a quarterly loss now expected.

Airlines and defense stocks gained ground during the day on the prospect of U.S. military reprisals, while airlines like AMR Corp. rebounded from stinging slides in the days following the attacks.

Aircraft giant Boeing Co. up $1.85 at $34.25, helped lift the blue-chip Dow after saying it will sell 30 of its 737 jetliners to China in a deal valued at about $1.6 billion. The S&P's aerospace and defense index rallied 3.60 percent. 

American Airlines parent AMR Corp. gained 77 cents to $20.67, while Delta Air Lines rose $1.30 to $27.09. Airlines suffered steep losses after the attacks and announced massive layoffs. 

Wal-Mart Stores Inc. jumped $2.24 to $52 and helped boost the Dow. The world's largest retailer said it expects earnings in line with Wall Street estimates despite the short-term impact of the attacks. 

Other companies lined up to warn about lower profits or cut jobs, though some shares rose. 

Media conglomerate Viacom Inc. said it expects about $500 million in costs this year due to the attacks, and media powerhouse News Corp. said it had lost many tens of millions of dollars in ad revenues. Viacom rose $1.56 to $35.50, while News Corp. gained 79 cents to $25.68. 

The Fed said it was poised to lower borrowing costs again to avert the growing threat of a recession in the aftermath of the attacks. The Fed said the attacks ``significantly heightened uncertainty'' in the weakened U.S. economy. Many economists believe the world's biggest economy already has slipped into recession. 

Most government data have yet to reflect the fallout from the attacks, but signs of economic disruptions abound. Companies have announced steep layoffs, while private surveys point to waning consumer confidence. 

``We've gotten hit with something we have never seen before,'' said James Glassman, an economist at J.P. Morgan. ``As the economy absorbs these shocks, it's appropriate for the Fed to be stepping on the gas as much as it would in a recession.''

Advancing issues led decliners 2 to 1 on the New York Stock Exchange. Volume came to an active 1.26 billion shares, compared with 1.17 billion Monday. 

The Russell 2000 index rose 4.19 to 401.79. 

Overseas, Japan's Nikkei stock average gained 1.7 percent. In Europe, Germany's DAX index rose 1.5 percent, Britain's FT-SE 100 and France's CAC-40 each gained 1.0 percent.

Reuters and the Associated Press contributed to this report.