(In first paragraph, corrects time period of record to nearly two years from nearly one year)

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* Dow up 2.81%, S&P 500 up 2.99%, Nasdaq up 3.19%

* Lyft plummets on concerns about ridership and spending

By Echo Wang and Devik Jain

May 4 (Reuters) - U.S. stocks ended sharply higher on Wednesday after the Federal Reserve delivered a widely expected interest-rate hike, and the S&P 500 recorded its biggest one-day percentage gain in nearly two years.

Stocks initially see-sawed after the announcement, then the indexes strengthened. The S&P 500's advance of almost 3% was the strongest since May 18, 2020.

The Federal Reserve on Wednesday raised its benchmark overnight interest rate by half a percentage point and said it would begin shrinking the central bank's $9 trillion asset portfolio next month in an effort to further lower inflation.

The U.S. central bank set its target federal funds rate to a range between 0.75% and 1% in a unanimous decision, with further rises in borrowing costs of perhaps similar magnitude likely to follow.

“It’s clear that they (the Fed) understand the need to contain the soaring prices,” said Greg Bassuk, chief executive at AXS Investments in Port Chester, New York.

“Even as the Fed gets more aggressive with rate hikes, we still need to grapple with the geopolitical tensions, the ongoing COVID issues as well as these wide-ranging corporate earnings results. So not withstanding the Fed move, we think we'll still see some more volatility ahead.”

Investors watched Powell's news conference for fresh clues on how far and how fast the central bank is prepared to go in an effort to bring down decades-high inflation.

The Dow Jones Industrial Average rose 932.27 points, or 2.81%, to 34,061.06, the S&P 500 gained 124.69 points, or 2.99%, to 4,300.17 and the Nasdaq Composite added 401.10 points, or 3.19%, to 12,964.86.

Concerns about a hit to economic growth due to a hawkish Fed, mixed earnings from some big growth companies, the conflict in Ukraine and pandemic-related lockdowns in China have hammered Wall Street recently, with richly valued growth stocks bearing the brunt of the sell-off.

Two separate sets of data showed private employers hired the fewest workers in two years last month, while expansion in the services sector unexpectedly lost some momentum in April.

Lyft Inc shares plummeted 30% amid concerns about the company's ridership and spending. The ride-hailing company reported first-quarter revenue of $875 million, a 44% increase over the previous year, while the number of active riders missed analyst expectations.

Starbucks Corp rose 9.9% after the coffee chain saw quarterly comparable sales grow 12% in North America.

Livent Corp gained 30.2% after it posted a better-than-expected quarterly profit and bolstered its 2022 revenue outlook on higher demand for lithium used in electric vehicle batteries.

All 11 of the major S&P sectors rose, with energy leading the gains.

Bank stocks climbed 3.5% after U.S. Treasury two-year yields, the most sensitive to the Federal Reserve's interest rate outlook, soared to their highest since November 2018. The benchmark 10-year yield topped 3% for a third consecutive day.

Volume on U.S. exchanges was 13.46 billion shares, compared with the 11.97 billion average for the full session over the last 20 trading days.

Advancing issues outnumbered declining ones on the NYSE by a 3.98-to-1 ratio; on Nasdaq, a 2.39-to-1 ratio favored advancers.

The S&P 500 posted two new 52-week highs and 37 new lows; the Nasdaq Composite recorded 28 new highs and 360 new lows. (Reporting by Echo Wang and Chuck Mikolajczak in New York, Devik Jain in Bengaluru; Editing by Shounak Dasgupta, Anil D'Silva and Cynthia Osterman)