American stocks climbed, adding to a rally across Europe and Asia, on speculation the government takeover of Fannie Mae and Freddie Mac will stabilize the global financial system battered by $507 billion in credit losses.

Citigroup Inc., Wachovia Corp., and Bank of America Corp. added at least 6.6% after Treasury Secretary Paulson said the government will provide short-term funding to mortgage lenders Fannie and Freddie. KB Home and D.R. Horton Inc. jumped more than 12%, sending a gauge of homebuilders to a four-month high. An advance in banks from Germany to Japan sent the MSCI World Index up 2.1%, the most since April.

The Standard & Poor’s 500 Indexsurged 25.48 points, or 2.1%, to 1,267.79, its steepest gain since August 8. The Dow Jones Industrial Average rose 289.78, or 2.6%, to 11,510.74. The Nasdaq Composite Index increased 13.88, or 0.6%, to 2,269.76. Almost three stocks climbed for each that fell on the New York Stock Exchange.

“This is significantly positive for the market,” a manager of $30 billion at Morgan Asset Management in Birmingham, Ala., Walter “Bucky” Hellwig, said. He doesn’t own Fannie or Freddie shares. “Investors were looking for some kind of resolution to the problem and this eliminates a lot of uncertainty.”

All but one of the 30 companies in the Dow advanced. About 1.7 billion shares changed hands on the NYSE in the busiest trading session since July 23. Treasury 10-year notes gained amid speculation the seizure of Fannie and Freddie won’t reverse an American economic slowdown. The dollar increased to the highest in almost a year against the euro.

The rally pared the S&P 500’s decline this year to less than 14% as the index heads for its first annual loss since 2002. Financial companies led the drop this year as the first nationwide decline in home prices since the 1930s saddled banks and investors with nonperforming loans to homeowners and builders.

Most financial companies gained as debt guaranteed by Fannie Mae and Freddie Mac, held by most banks and securities firms, rose in value, and other types of debt securities rallied in sympathy. Fannie Mae current-coupon 30-year fixed rate securities yielded 1.59 percentage point more than 10-year Treasury debt, the smallest margin since May. American fixed mortgage rates dropped about a quarter of a percentage point this morning.

“Market lending rates have been lowered by a quarter point on the announcement, without a lot of details,” the head of investments at Putnam Investments in Boston, which manages $163 billion, Kevin Cronin, said. “That’s going to be reflected in the valuation of the stocks of companies that hold such assets.”

Citigroup climbed $1.25 to $20.32, while Bank of America added $2.50 to $34.73 and Wachovia jumped $2.24, or 13%, to $18.99. JPMorgan Chase & Co., the third-biggest American bank, increased 4.9% to $41.55. Goldman Sachs Group Inc. climbed 4% to $169.73 after Merrill analyst Guy Moszkowski raised his recommendation on the shares to “buy” from “underperform.”

The S&P 500 Financials Index rallied 4.7%, posting its best gain since August 5 and reaching its highest level since June 19. The rally in banks came even as Oppenheimer & Co. analyst Meredith Whitney slashed her third-quarter earnings estimates for Goldman, Lehman Brothers Holdings Inc., and Merrill, citing a decline in trading volume and share sales.

Financial stocks surpassed technology stocks to become the largest of the S&P 500’s 10 main industry groups. Banks ceded the position to computer, semiconductor, and software makers in May after six years at the top. Financials increased to 16.2% of the benchmark index from 15.8%, while technology companies slid to 15.7% from 16%.

KB Home, the fifth-largest U.S. homebuilder by revenue, rose 14% to $23.54 for the biggest gain in the S&P 500. D.R. Horton, the largest, advanced 12% to $14.11. An index of homebuilders in the S&P 500 rose 12% to the highest since May 20.

The takeover of Fannie and Freddie “goes a long way toward addressing the no. 1 negative, the downward spiral in housing prices,” the president and chief executive officer of Waddell & Reed Financial Inc., which manages $70 billion, Henry Herrmann, said.

The Federal Housing Finance Agency will put Fannie and Freddie under conservatorship, replace their chief executives and eliminate their dividends. Under the plan, the Treasury will receive $1 billion of senior preferred stock in coming days, with warrants representing ownership stakes of 79.9% of Fannie and Freddie.