TORONTO (Reuters) - The Toronto Stock Exchange's benchmark index finished a zig-zag session 200 points higher yesterday, as investors spooked by the credit crisis were soothed by the US Federal Reserve's surprise cut to the discount rate at which it lends money to banks.

The S&P/TSX composite index rose 200.88 points, or 1.56 percent, to close at 13,049.58. It lost 200 points during Thursday's session. The index was down three percent for the week.

Yesterday's session saw the composite in wild swings, as it spiked 300 points higher at the open before turning negative later in the morning — only to swing more than 100 points higher just 10 minutes later.

The Fed's discount rate cut assuaged fears that the US central bank would stand on the sidelines while the credit and liquidity crisis gripping world financial markets continues unabated, observers said.

"The cavalry has ridden over the hill," said Gavin Graham, chief investment officer at the Guardian Group of Funds, adding: "There are many more shoes to drop, but you know that the central banks are on it."

As well, yesterday's move suggests that a cut to the Fed's key federal funds rate could be coming, Graham added.

The Toronto rally was broad, as every one of the benchmark's 10 main groups advanced. Energy added 1.61 percent, financials rose 2.04 percent and resource-heavy materials added 0.63 percent.

The S&P/TSX 60 index of Canadian blue-chip names rose 12.92 points, or 1.74 percent, to 757.10. Kate Warne, Canadian market strategist at Edward Jones, also said the discount rate cut shored up investor confidence in the face of turmoil.

"I think investors may take any bad-news announcements with a bit more confidence that things aren't going to be allowed to spiral out of control," she said.

"I think there was beginning to be a worry that this could just get worse and worse and nobody was going to do anything."