New York  - US stocks surged Wednesday as the Federal Reserve kept its key interest rate at a record low and on hopes for an economic stimulus package, as well as government plans for a "bad bank" to absorb toxic investments.

Citigroup Inc and Bank of America Corp surged more than 13 per cent after reports that President Barack Obama could announce the creation of a so-called "bad bank," which would take the troubled mortgage assets off the balance sheets of banks and place them in a new government-backed entity.

The Fed on Wednesday announced it would keep its key interest rate at a record low of 0.25 percentage points or less, as it works to revive borrowing and stabilize the financial system.

The central bank first brought its federal funds rate down to an unprecedented range of 0-0.25 per cent in December. The Federal Open Market Committee, which sets the target, said it expects to keep rates low in the near future.

The US House of Representatives was expected to vote later Wednesday on an unprecedented 825-billion-dollar economic stimulus package to help pull the world's largest economy out of its most serious recession in decades.

Stocks closed higher for a third straight trading day Wednesday. The blue-chip Dow Jones Industrial Average gained 200.72 points, or 2.46 per cent, to 8,375.45. The broader Standard and Poor's 500 Index climbed 28.38 points, or 3.36 per cent, to 874.09. The technology- heavy Nasdaq Composite Index added 53.44 points, or 3.55 per cent, to 1,558.34.

The US currency rose against the euro to 76.01 euro cents from 75.94 euro cents on Tuesday. The dollar gained against the Japanese currency to 90.31 yen from 88.94 yen on Tuesday. dpa