Investors sent stock prices to their highest levels in two months yesterday in anticipation of today's meeting of Federal Reserve rate-setting officials and the outcome of nationwide elections.

"There are two new key elements going into the soup of information this week," said Duncan W. Richardson, chief equity investment officer at Eaton Vance Corp., an investment firm in Boston. "People were buying in part on the expectation that the Fed will provide a rate cut. Many are also looking forward to an end to the political uncertainty of a close election."

The Dow Jones industrial average finished up 1.2 percent, or 106.67, at 8678.27. The broader Standard & Poor's 500-stock index rose 7.04, to 915.39. The tech-dominated Nasdaq composite index rose 4.63, to 1401.17.

The recent gains come in the wake of a string of negative announcements from the Commerce Department and other organizations that monitor the U.S. economy, showing stagnating economic growth, rising unemployment and declining consumer sentiment. Analysts said they believe those factors will guide the central bank's Federal Open Market Committee to lower interest rates.

Fed officials are expected to announce their decision around 2:15 this afternoon. Analysts expect a rate cut of one-quarter of a percentage point from the current 40-year-low level of 1.75 percent. Fed funds futures -- monthly futures contracts that indicate how traders are betting the Fed will act -- are already pricing in a quarter-point cut.

"If the Fed does what is expected, we shouldn't see much of a response in the stock market," said Jeffrey M. Applegate, chief equity analyst at Lehman Brothers. "If they lower rates more than 25 basis points [0.25 of a percentage point], we could see a surge. And if they don't do anything, when people are expecting them to act, there could be a negative response."

Investors will also be watching the results of meetings this week of the European Central Bank and the Bank of England. Both institutions have been more reluctant than the Fed to cut rates in recent months.

Some analysts expressed concern that even a rate cut might not be enough to stimulate the struggling economy. This concern was reflected in the dollar's drop to a three-month low against the euro. "The problem then becomes that there isn't much more left to cut," said Kenneth Safian, head of Safian Investment Research.

The price of 10-year Treasury notes fell slightly on the day but remained relatively steady, reflecting the fact that an interest rate cut was widely anticipated by investors.

Safian said that investors were hoping for a strong showing by Republicans in yesterday's midterm elections. Shares of energy, drug, and defense companies, which analysts said would be most likely to benefit from a Republican victory, led yesterday's advances. "Republicans tend to favor tax cuts to stimulate the economy, rather than relying on interest rate cuts," Safian said.

But the worst case, analysts said, would be a repeat of the 2000 presidential elections, where the results were not known until a month after Election Day. "The most important result is a measure of certainty," said Richard E. Cripps, chief equity market strategist at Legg Mason Wood Walker.

Other Indicators

* The New York Stock Exchange composite index rose 3.58, to 485.80; the American Stock Exchange index rose 0.47, to 832.64; and the Russell 2000 index of smaller-company stocks fell 0.90, to 386.07.

* Advancing issues outnumbered declining ones by 10 to 9 on the NYSE, where trading volume fell to 1.35 billion shares, from 1.66 billion on Monday. On the Nasdaq, decliners narrowly outnumbered advancers and volume totaled 1.66 billion, down from 2.32 billion.

* The price of the Treasury's 10-year note fell $2.19 per $1,000 invested, and its yield rose to 4.07 percent, from 4.05 percent on Monday.

* The dollar fell against the Japanese yen and the euro. In late New York trading, a dollar bought 121.82 yen, down from 122.31 late Monday, and a euro bought 99.94 cents, up from 99.71.

* Light, sweet crude oil for December delivery settled at $26.14 a barrel, down 81 cents, on the New York Mercantile Exchange.

* Gold for current delivery fell to $318.20 a troy ounce, from $318.30 on Monday, on the New York Mercantile Exchange's Commodity Exchange.