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Stocks Rally Ahead of Fed Decision

The combination of a better-than-expected report on the service sector and oil's drop below $120 a barrel propelled the Dow to a triple-digit gain.

The Dow Jones Industrial Average was up more than 200 points, or nearly 2 percent. The S&P 500 and Nasdaq also posted solid gains.

The Institute for Supply Management reported its gauge of service-sector activity rose more than expected to 49.5in July from 48.2 in June but remained below 50, indicating a second straight month of contraction. New orders declined but a measure of employment rose. And, on a day when the market is keenly focused on inflation, there was some relief as an index of prices paid fell by more than four points.

The service sector is a closely-watched gauge of the economy as it represents 80 percent of economic activity.

Crude oil dropped more than $1, trading between $120 and $121 a barrrel, after earlier hitting a three-month low of $118 a barrel.The next stop will be $100 a barrel, according to technical analyst Nick Batsford from Hobart Capital.

The recent drop in commodities is giving stocks room to run by relieving inflationary pressure and taking some heat off the Fed, which wants to avoid slowing economic growth by pushing rates higher, Dodge Dorland, chief investment strategist at Landor Capital Management, told "Worldwide Exchange."

"Oil at the low yesterday in fact touched the 20 percent correction level," Kevin Ferry, of Cronus Futures Management, said on CNBC. "If that was a stock, people would be talking about a potential bear market in oil, so we'll see how it responds today."

The service report-oil combo created a little more action in the market than usual on a Fed meeting day.

The Fed's Open Market Committee is expected to hold its target for a interest rates to 2 percent. Investors will be watching the statementto see if the Fed offers any insight on inflation.

In earnings, Dow component Procter & Gamble beat expectations as price increases and cost controls helped offset soaring prices for oil and other commodities. But the company, which makes everything from Pampers diapers to Olay skin-care products,

also said it expects commodity costs to rise by $3 billion in the fiscal year begun July 1, cutting gross margins, and leading to a forecast for earnings that could be below the average Wall Street estimate.

The world's largest consumer products maker's profit was $3.02 billion, or 92 cents a share, in the fiscal fourth quarter ended June 30, compared with $2.27 billion, or 67 cents a share, a year earlier. Excluding benefits from the adjustment of tax reserves, earnings were 80 cents a share in the quarter, compared to Wall Street expectations of 78 cents.

In the financial sector, Lehman Brothers ismulling a sale of its investment-management division, which includes its Neuberger & Berman asset management unit as well as stakes in hedge funds and private equity funds, CNBC has learned.

And Merrill Lynch CEO John Thain told CNBC that thebrokerage firm is "very well capitalized" but didn't rule out further writedowns if the value of risky assets continues to decline.

Goldman Sachs shares slipped after Merrill cut its 2008 earnings estimates and slashed its price target on the stock to $205, citing negative trends in some of the firm's strongest businesses.

Cablevision jumped after the company announced that it is considering a spinoff of one or more divisions and other options to boost the company's struggling stock.

On Tap:

TUESDAY: Fed meeting, decision on rates; Earnings from P&G, Cisco and News Corp.
WEDNESDAY: Mortgage applications; crude inventories; Earnings from Freddie Mac, Time Warner, Sprint Nextel and AIG
THURSDAY: Jobless claims; existing-home sales; consumer credit; Earnings from Barr Pharma, Toyota
FRIDAY: Productivity; wholesale trade; Earnings from Berkshire Hathaway

Send comments to cindy.perman@nbcuni.com.