* ISM services index climbs more than expected
* Bank of Japan to pump more funds into economy
* Dow up 1.5 pct, S&P up 1.8 pct, Nasdaq up 2 pct
* For up-to-the-minute market news see [STXNEWS/US] (Updates to midday, changes byline)
By Chuck Mikolajczak
NEW YORK, Oct 5 (Reuters) - U.S. stocks rallied on Tuesday with the S&P hitting its highest level since mid-May as investors cheered encouraging economic data and new steps by the Bank of Japan to stimulate its lackluster economy.
The pace of growth in the U.S. services sector accelerated more quickly than forecast last month, while hiring also picked up, according to the Institute for Supply Management index.or details, see [ID:nN05177294]
The Bank of Japan cut its overnight rate target to virtually zero and pledged to buy 5 trillion yen ($60 billion) worth of assets in a fresh dose of economic stimulus. [ID:nTOE69305D]
The combination gave investors a reason to be optimistic about an improving business climate and the prospect of further steps by governments to pump new life into the global economy.
"You are starting to see a pattern here where the Japanese government is going to be cutting corporate tax rates, doing quantitative easing, doing fiscal stimulus -- that is to say they are going to throw everything they can to get the economy going," said Phil Orlando, chief equity market strategist at Federated Investors in New York.
"That is a good thing in and of itself, and maybe it serves as a model for something that we should be looking at, specifically, cutting the corporate tax rate, so all of that was certainly a positive."
The Dow Jones industrial average <.DJI> gained 163.51 points, or 1.52 percent, to 10,914.78. The Standard & Poor's 500 Index <.SPX> rose 20.07 points, or 1.77 percent, to 1,157.10. The Nasdaq Composite Index <.IXIC> climbed 47.44 points, or 2.02 percent, to 2,391.96.
The S&P managed to pierce the 1,150 level on the news, which has been the top of the recent trading range.
On Monday, U.S. Federal Reserve Chairman Ben Bernanke said the Fed's asset purchases lowered borrowing costs and helped the economy, adding that more buying could further ease conditions.[ID:nN04133934]
Financials were among the best performers, with the KBW
Bank index <.BKX> up 3.2 percent. Bank of America Corp
Among active stocks, Walgreen Co
The likelihood of quantitative easing in the United States pushed the euro to its highest level against the dollar since February and lifted commodity prices. Crude oil jumped 1.1 percent to above $82 a barrel and neared its highest price since Aug. 6, while gold hit a record high at $1,340.20 an ounce. [ID:nN05188723] and [ID:nLDE6940TL] (Reporting by Chuck Mikolajczak; Editing by Jan Paschal)