US STOCKS-Stocks fly as Fed's cash infusion calms credit fear

(Updates to afternoon)

By Justin Grant

NEW YORK, March 11 (Reuters) - U.S. stocks surged on Tuesday, led by financial shares, after the Federal Reserve said it would add up to $200 billion to strained credit markets in a coordinated effort with other central banks.

In a surprise move, the Fed said it was expanding a securities lending program and will accept a broader base of securities as collateral, including many mortgage bonds whose value has declined as the housing bubble burst.

Shares of mortgage-related companies and banks rallied following the Fed's announcement, helping the market recover after three days of losses. Stocks had been close to their lows for the year as recession fears mounted.

Home builders' shares also rallied.

But while the Fed's action could help boost mortgage lending and ease the drag of the housing slump on the broader economy, analysts said a continued rally hinges on the health of the beleaguered credit markets.

"The key to any sustainable rally is going to be an improvement on the credit side," said Michael Darda, chief economist at MKM Partners LLC, in Greenwich, Connecticut.

"But this is positive. The Fed's making a major effort to get liquidity and credit into the cracks and crevices of the financial system that need it the most."