NEW YORK (Reuters) - Stocks rallied more than 2 percent on Wednesday, powered by the best day for banks in 16 years as unexpectedly strong results from Wells Fargo & Co relieved worry about a credit crisis spiraling out of control.

Trading specialists work on the floor at the New York Stock Exchange, July 16, 2008. REUTERS/Chip East

A $4 drop in oil prices gave more fuel to the rally, offsetting an early report that showed U.S. consumer prices in June rose by the most since the aftermath of Hurricane Katrina in September 2005.

Investors poured into bank stocks, driving Wells Fargo up 32.8 percent, while shares of rivals like Citigroup, JPMorgan Chase & Co and Bank of America Corp jumped 13 percent or more.

Wells Fargo, the fifth-largest U.S. bank and a big mortgage lender, also raised its dividend at a time when competitors are cutting them. That allayed some concerns about financial companies just days after IndyMac collapsed in one of the biggest bank failures in U.S. history.

Shares of mortgage finance companies Fannie Mae and Freddie Mac, which had lost over 60 percent of their value since the beginning of the month, were also swept up in the broad financial rally, surging 30 percent or more. Both companies got a lift from Federal Reserve Chairman Ben Bernanke’s remarks that they are “in no danger of failing.”

“Oil prices came down $4 a barrel and financials went up, particularly on the Wells Fargo news. One popular trade was to short financials and long energy and that trade got killed today,” said Brian Gendreau, an investment strategist in New York for ING Investment Management Americas, which recently went “neutral” on U.S. stocks.

The Dow Jones industrial average jumped 276.74 points, or 2.52 percent, to 11,239.28, while the Standard & Poor’s 500 Index gained 30.45 points, or 2.51 percent, to 1,245.36. The Nasdaq Composite Index shot up 69.14 points, or 3.12 percent, to 2,284.85.

The three indexes had their largest single-day percentage gain since April 1 and the KBW bank index soared 17.27 percent, its largest one-day percentage gain since it began tracking in May 1992.

ALTERA CLIMBS, eBAY FALLS LATE

Further boosting the Nasdaq were shares of Altera Corp, which jumped 12.1 percent to $21.54 on news the chip maker’s second-quarter revenue rose more than analysts expected.

But technology shares may be under pressure on Thursday, after online auctioneer eBay Inc forecast a weak third quarter, sending its shares down about 7 percent to $26.20 in after-hours trade. On the Nasdaq, eBay had closed at $28.10, up 4.5 percent.

U.S. crude prices for August delivery fell $4.14 to settle at $134.60 per barrel, a slump of over $10 since Monday’s close, hurting shares of energy companies such as Chevron, down 3.4 percent at $86.39, and Exxon Mobil, down 1.7 percent at $80.81.

Lower oil prices boosted the airline sector, however, pushing the airline stock index up 18.1 percent.

Shares of retailers also gained because any reduction in energy costs would ease the strain on consumers, who have been struggling with high gasoline prices. The S&P retail index leaped 5.5 percent. On the Nasdaq, shares of Internet retailer Amazon.com climbed 7.2 percent to $71.84.

A Dow Jones index of home builders’ shares popped up 10.3 percent, its biggest advance in four months.

Trading volume was fairly active on the New York Stock Exchange, with about 1.73 billion shares changing hands, below last year’s estimated daily average of roughly 1.90 billion. On Nasdaq, about 2.44 billion shares traded, above last year’s daily average of 2.17 billion.

Advancing stocks outnumbered declining ones by about 3 to 1 on both the NYSE and the Nasdaq.