Stocks rallied Friday as investors were encouraged by a cut in discount rates by the Fed.

"As long as we can stay out of the woods with further credit problems, we can build from this base and go forward steadily," said James Maguire, Sr., managing director at LaBranche. "I think we've hit the bottom. We might fish around here for a bit, but I'm very confident."

The Dow Jones Industrial Average gained more than 225 points and was up as much as 321 points earlier in the session. The S&P 500 and the Nasdaq Composite each closed with gains of more than 2%.

"I'm impressed with the afternoon hold here," said Arthur Cashin, head of floor operations at UBS. "Early on, it looked like it was all short-covering, but they've managed to maintain gains ... It may be a temporary bottom."

The Dow posted a weekly loss of 1.2%, the S&P 500 ended down 0.5% and the Nasdaq Composite fell 1.6%.

The Fed said it lowered the discount rate on loans to banks to 5.75% from 6.25% to "promote the restoration of orderly conditions in the financial markets." The central bank left the more important federal funds rate unchanged at 5.25%.

Policymakers also injected and additional $6 billion of liquidity into the banking system, bring the recent total liquidity additions to $80 billion.

All ten S&P 500 sectors were trading higher, with the influential financials segment leading the charge. Brokerage stocks, beaten down in the recent selloff, rebounded. Energy stocks gained as oil prices moved higher. Volume was heavy due to the Fed's action and options expiration.

"The Fed made a step in the right direction to ease some of the liquidity concerns," said Nick Raich, director of research at National City Private Client Group. "There could be more near-term turbulence, but over the next 12 to 18 months, I think investors are going to look back and realize that today was a good day to get in the market."

Some market strategists were not as sanguine.

"As much as you don't want to fight the Fed, we're not so sure how many other shoes will drop in the marketplace," said John O'Donoghue, head of trading at Cowen & Company.

Leading Dow percentage gainers included JPMorgan Chase , Exxon Mobil and Alcoa .

Stocks soared at the open, with the Dow rising more than 300 points, before paring gains. Analysts welcomed the Fed action, but many wondered if it will be enough.

"This is not a panacea for the problems that are in this economy," said Ned Riley, CEO of Riley Asset Management. "I'm very optimistic long-term, but we still have a systemic growth problem. I think the great anxiety right now is that the Fed may just inject this little bit of stimulus in, but then back away again because they fear inflation."

Shares of Countrywide Financial rose after Banc of America Securities upgraded the stock to "neutral" from "sell," saying the weak stock price has created a better risk-reward scenario.

Dell said it will restate more than four years of financial results after accounting irregularities and mistakes were discovered during a year-long past review. The mistakes could end up costing the computer company as much as $150 million.

New York light sweet crude futures rose after the Fed cut the discount rate. Traders were also concerned about Hurricane Dean becoming more powerful and possibly heading to the Gulf of Mexico. A major fire at a U.S. refinery also pressured oil prices higher.

The University of Michigan Consumer Sentiment Index fell to 83.3 in August, its lowest reading since August 2006. The data was lower than expected.

European Stocks Close Sharply Higher

European stocks reversed losses to close sharply higher after the action from the U.S. central bank.

The London FTSE-100, Paris CAC-40 and the Frankfurt DAX all finished significantly higher.

The tightening credit market hasn't deterred Borse Dubai's plans for expansion as it announced a takeover offer for the Nordic exchange ownerOMX, valuing OMX at 27.7 billion Swedish crowns ($3.98 billion). That throws an agreed upon deal between Nasdaq and OMX into doubt.

European bank BNP Paribas eased fears of U.S. subprime contagion by saying the impact on quarterly earnings from its frozen funds would be "zero," according to the bank's head of asset management.

And corporate earnings provided some buying opportunities as industrial supplier Hagemeyer reiterated its full-year expectations andmedia group Schibsted posted a better-than-expected 40% rise in second-quarter core profit.

In other news, Nokia asked the U.S. International Trade Commission (ITC) to bar the import of some Qualcomm chipsets to the U.S. on grounds they infringe on Nokia patents.

And WPP CEO Martin Sorrell told CNBC that analysts would now be expecting the advertising giant to achieve like-for-like revenue growth of between 5% and 6% in 2007.

Asian Stocks Slaughtered

Asian stocks were slaughtered Friday as markets limped battered and bruised towards their lowest close in a decade, hit by a wave of panic selling triggered by more margin calls and growing anticipation of more fund redemptions. Japan plummeted over 5% -- its biggest percentage drop in almost 7 years -- over 800 points, while South Korea extended losses by another 3%.

The Hang Seng Index slumped to near five-month lows, falling over 5%, but then surged higher to finish the session 1.4% in the red.

The Singapore's Straits Times Index also saw massive declines only to stage a late rebound, closing 0.7% lower.