WASHINGTON -- The Federal Reserve slashed a key interest rate to the lowest level on record and pledged to use "all available tools" to combat a severe financial crisis and prolonged recession.

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The central bank said it reduced the federal funds rate, the interest that banks charge one other, to a range of 0 to 0.25 percent.

That's down from the 1 percent target rate in effect since the last meeting in October.

The Fed's aggressive move was greeted enthusiastically by Wall Street. The Dow closed 359 points up to finish the day at 8,924. Gainers on the New York Stock Exchange outnumbered losers by a nearly 6-1 margin. The Nasdaq Composite Index gained 81 points at 1,589.89. And the S&P 500 Stock Index was up 44 points at 913.18.

Federal Reserve Chairman Ben Bernanke and his colleagues said they anticipate that "weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time" as they struggle to contain a financial crisis that is the worst since the 1930s and a recession that is already the longest in a quarter-century.

The central bank is moving into uncharted territory with this newest rate cut.

Nonetheless, Fed Chairman Ben Bernanke has made it clear that the Fed isn't running out of ammunition to fight the crisis. It is exploring using tools other than rate cuts to revive the economy.

"The focus of the Committee's policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve's balance sheet at a high level," the Fed said in a prepared statement.

The prime rate for many consumer and small-business loans will drop by an amount corresponding to that of the federal funds rate. The prime, which was at 4 percent, is used to peg rates on home equity loans, certain credit cards and other consumer loans.

Bernanke and his colleagues wrapped up a two-day meeting Tuesday.

President-elect Barack Obama said Tuesday that rates are getting about as low as they can get.

He said tools are still available, but it's critical for other branches of government to "step up."

He said an economic recovery plan is still "absolutely critical."

Obama said his economic team was meeting Tuesday, working on what he called a "bold agenda."

Democrats Working On Stimulus Package

Meanwhile, head Democrats said they're working at a fevered pace so they will have a stimulus package ready for President-elect Barack Obama to sign next month.

House Speaker Nancy Pelosi said Democrats are preparing a massive economic recovery bill in the range of $600 billion.

It would blend immediate steps to counter the slumping economy with longer term federal spending on infrastructure like energy efficiency projects.

The California Democrat told reporters that economist Mark Zandi has recommended to Democrats an economic stimulus in that range -- including $400 billion in infrastructure and $200 billion for tax cuts.

Pelosi said Capitol Hill Democrats are already "hard at work" writing a stimulus measure to pass next month. It's expected to combine tools such as tax cuts and help to states suffering from big budget deficits with infrastructure projects such as road and bridge repairs.

Pelosi also said that before the Bush administration seeks access to the remainder of a $700 billion financial rescue fund, Congress should specify that the money be used to reduce mortgage foreclosures.

The Treasury Department has come under bipartisan criticism in Congress for shifting its strategy away from making large purchases of troubled mortgage assets.

The Treasury has spent much of the first $350 billion of the Troubled Asset Relief Program on injecting capital into financial institutions to help ease the credit crunch.

Pelosi said she's spoken to House Financial Services Committee Chairman Barney Frank about the possibility of drafting new legislation to specify the need to ease foreclosures.

The Bush administration could seek access to the second half of the TARP money between now and Jan. 20, when Obama is sworn into office.

Congress has 15 days to reject such a request.