* Fed raises key rate by 25 basis points
* Utilities sector leads gains, energy lags
* S&P 500 finishes third consecutive day higher
By Rodrigo Campos
NEW YORK, Dec 16 (Reuters) - U.S. stocks rallied on Wednesday after the Federal Reserve announced it is raising its key policy rate for the first time in nearly a decade in a sign of confidence in the U.S. economy.
Markets judged the Fed's statement to be dovish, supportive of risk assets including equities. Defensive sectors of the market, recently hit in anticipation of the rate hike, were the best performers.
The Fed made clear that the 25-basis point rate hike was a tentative beginning to a "gradual" tightening cycle, and that in deciding its next move it would put a premium on monitoring inflation, which remains mired below target.
"Wrapped in dovish language, the Federal Reserve has just embarked on what will be the loosest tightening in its history," said Mohamed El-Erian, chief economic advisor at Allianz in Newport Beach, California.
"The Fed is going out of its way to assure markets that, by embarking on a 'gradual' path, this will not be your traditional interest rate cycle. Instead it will be one remembered as an unusually loose tightening."
The Dow Jones industrial average rose 224.18 points, or 1.28 percent, to 17,749.09, the S&P 500 gained 29.66 points, or 1.45 percent, to 2,073.07 and the Nasdaq Composite added 75.78 points, or 1.52 percent, to 5,071.13.
The U.S. central bank said the economy is expected to continue to perform well and a slight increase in the fed funds rate was appropriate, while it recognized that even after this hike monetary policy remains accommodative.
"This was a Santa Claus statement," said John Augustine, chief investment officer at Huntington Wealth & Investment Management in Columbus, Ohio.
They Fed "gave savers a little bit more interest, investors a little bit more confidence in the economy, businesses a little bit more expectation of inflation," he said. "What caught our attention the most was that it was a hawkish stance and a dovish statement."
All but one of the ten major industry sectors of the S&P 500 traded higher, with utilities the largest percentage gainer on a 2.6 percent advance. Energy fell 0.5 percent as crude oil prices continued to fall.
"There was a lot of negative positioning going into today in rate-sensitive asset classes," said Katrina Lamb, head of investment strategy and research at MV Financial in Bethesda, Maryland.
Because of that, she said, it was not surprising that utilities led the S&P 500 gains. "I'd be surprised to see utilities going on a tear and for months being the outperforming sector," Lamb said.
Advancing issues outnumbered declining ones on the NYSE by 4.60 to 1, while on the Nasdaq 2,089 issues rose and 751 fell for a 2.78-to-1 ratio favoring advancers.
The S&P 500 posted 16 new 52-week highs and 10 lows; the Nasdaq recorded 47 new highs and 95 new lows.
Equity volume on U.S. exchanges was approximately 8.48 billion shares, above the 7.2 billion average over the last 20 trading days.
Additional reporting by Jennifer Ablan and David Randall; Editing by Nick Zieminski