Dow closes with largest gain since March 2009

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NEW YORK (CNNMoney) -- Investors around the world raced to scoop up stocks on Wednesday, after the Federal Reserve said it will work with other central banks to support the global economy.

All three major stock indexes closed the day up more than 4%. The Dow's 489-point gain is the largest of 2011 and the best percentage gain since March 2009. Still, despite today's run-up, the Nasdaq and S&P 500 are down for the year.

The central banks' coordinated market intervention gave investors hope that world leaders could take necessary steps to avoid a credit crunch or market paralysis stemming from Europe's sovereign debt crisis.

"It's the first time we've seen this type of global coordination since November 2008," said Michael James, a senior equity trader at Wedbush Morgan. "The degree of coordination sends a message to the markets that global leaders are going to do whatever they need to do to instill confidence in the markets." (Read: Welcome to the Great Global Easing)

For now at least, investors appear willing to ignore any possible parallels between today and November 2008, and just how precarious the state of financial system might be to warrant such a move by global bankers.

The Dow Jones industrial average (INDU) closed the day up 490 points, or 4.2%, and ahead 0.6% for the month. The S&P 500 (SPX) added 52 points, or 4.3%, but stayed down 0.5% for the month. The Nasdaq (COMP) composite moved up 105 points, or 4.2%, but still shed 2.3% in November.

Bank stocks also rallied on news of the central banks' plans and helped investors ignore Tuesday evening's Standard & Poors' downgrade of big bank stocks. Shares of Goldman Sachs (GS, Fortune 500), Morgan Stanley, (MS, Fortune 500) Citigroup (C, Fortune 500), Jefferies (JEF) and JPMorgan Chase (JPM, Fortune 500) spiked more than 7%. Bank of America (BAC, Fortune 500), which hit its 52-week low Tuesday, also closed up 7.3%.

The Federal Reserve, along with five other central banks including the European Central Bank and the Central Bank of Canada, announced a joint action to lower interest rates on dollar liquidity swaps -- making it cheaper for banks around the world to trade in U.S. dollars.

The move is an attempt to "ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity," the banks said in a statement.

Adding to the markets' enthusiasm was more evidence that the U.S. economy could be picking up steam after two better-than-expected reports on private-sector jobs, housing and Midwest manufacturing.

"The fundamentals just keep marching forward despite the market turmoil," said Doug Cote, chief investment strategist at ING. "The real economy seems indifferent to the EU debt headlines."

European markets closed after inking sharp gains in the wake of the news. Germany's DAX (DAX) closed up 5%. England's FTSE 100 (UKX) ended the day up 3.2%. France's CAC 40 (CAC40) moved up 4.2%.

World markets had already been modestly higher prior to the announcement, as reports said eurozone finance ministers have approved an increase to the region's bailout fund, and may potentially receive help from the IMF.

China also announced Wednesday that it will cut its banks' reserve requirements, to help ease liquidity and prop up the global economy.

French downgrade could derail eurozone rescue

U.S. stocks finished mostly higher Tuesday, with the Dow and S&P extending gains from the previous day's rally, as investors remained hopeful that European leaders are making progress towards resolving the continent's debt crisis.

World markets: Asian markets -- which closed before the news from various central banks came out -- ended lower. The Shanghai Composite (SHCOMP) tumbled 3.3%, the Hang Seng (HSI) in Hong Kong dropped 1.5% and Japan's Nikkei (N225) ticked down 0.5%.

Economy: A report from Automatic Data Processing showed that private- sector employment grew by 206,000 jobs in November. Economists surveyed by Briefing.com expect private sector jobs to have increased by 125,000 for the month of November.

The Chicago Purchasing Managers Index, a report on manufacturing activity in the Midwest, came in well above the level that signal expansion in the sector.

In the afternoon, the Fed's Beige Book was released illustrating a slow to moderate pace of growth based on economic outlooks from the 12 district banks across the country.

Companies: Shares of American Eagle (AEO) rose after it released quarterly results before the opening bell.

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On Tuesday, American Airlines' parent company, AMR (AMR, Fortune 500), announced it had filed for Chapter 11 bankruptcy. The company's stock plunged more than 80% during trading Tuesday, but rose 25% Wednesday.

Currencies and commodities: The dollar gained against the euro, the British pound and the Japanese yen.

Oil for January delivery gained 43 cents to $100.22 a barrel.

Gold futures for December delivery moved up $30.50 to $1,744.20 an ounce.

Bonds: The price on the benchmark 10-year U.S. Treasury rose slightly, yielding 2.07%.