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The Fed's updated guidance is likely a few weeks away. It is expected to take a conservative approach in deciding which banks can increase dividends and assess each bank individually, according to a person familiar with the matter.

Banks have been pushing to boost dividends. But regulators have balked at giving them the green light, citing uncertainty about the economic outlook and new capital rules.

With global capital rules and the U.S. financial regulatory system retooling farther down the track, the environment is more conducive to letting strong banks increase dividend payments.

The Fed does not want to prevent banks that are viewed as particularly strong from boosting dividends, a source said.

The news of the Fed move was first reported by the Wall Street Journal. The KBW Bank Index closed up 3.6 percent on Thursday. The Dow Jones industrial average ended 1.96 percent higher.

Industry officials welcomed the news.

"The economy and many older Americans rely on dividends and, if a bank is strong enough, it should be allowed to resume paying dividends," said Scott Talbott, an executive at The Financial Services Roundtable.

Banks are better capitalized than they have been for some time, and the largest ones have the highest capital levels in years, according to analysts.

"If you've seen the numbers that the banks are producing, things are getting a lot better," said Greg Donaldson, founder of Donaldson Capital Management in Evansville, Indiana.

Retail investors are still significantly invested in banks and have been hankering for dividends, he said. Investors are saying, "We want action. You're sweet talking us, you're telling us things are getting better -- well, show us!... If things are really getting better, show me the cash!" he said.

Uncertainty over how much more capital banks would have to keep on hand to satisfy new domestic and international bank rules had been an obstacle to allowing banks to raise dividends.

That obstacle has been partially cleared after international regulators last month struck a deal on so-called Basel III capital rules. The accord is expected to be endorsed by leaders from the Group of 20 developed and emerging nations later this month in Seoul.

The new Basel rules will force banks to hold top-quality capital equal to 7 percent of risk-bearing assets, more than triple current standards, to better withstand economic downturns and financial shocks.

Banks will have until 2015 to meet the minimum core Tier 1 capital requirement, which consists of shares and retained earnings worth at least 4.5 percent of assets. An additional 2.5 percent "capital conservation buffer" will have to be in place by 2019.

In order to be allowed to boost their dividend, banks will not necessarily have to be able to meet this standard now but they will have to have a detailed plan for doing so, according to a source. They also will have to include in their plans any capital standards they have to meet under the new Dodd-Frank financial reform law.

(Reporting by Mark Felsenthal and Dave Clarke; Additional reporting by Elinor Comlay in New York; Editing by Padraic Cassidy, Dan Grebler and Andrew Hay)

Rising prices and improving traffic in its stores gave it leeway to hike its fiscal 2011 outlook. The world's biggest coffee company recently raised prices on large and labor-intensive drinks to offset surging prices for coffee and other commodities, easing concerns that those higher costs would dampen profits.

U.S. sales at restaurants open at least 13 months jumped 8 percent in the fiscal fourth quarter from a year ago, driven by a 6 percent rise in customer visits and a 2 percent increase in spending per visit.

International same-restaurant sales were up 7 percent, helped by a 4 percent traffic increase and a 3 percent rise in average ticket.

Those factors, coupled with efficiency efforts and cost controls, prompted the company to hike its earnings target for the current 2011 fiscal year to a range of $1.41 to $1.47 per share, from $1.36 to $1.41 previously. Wall Street's average forecast was for $1.43, near the low end of the new range.

"The increase really is based on the strength of the quarter we just recorded and the momentum we bring into the new year," Starbucks Chief Financial Officer Troy Alstead said in a telephone interview.

Shares in Starbucks, which dipped below $8 in 2006, rose 3 percent to $30.63 following the company's earnings report.

BIGGER PROFITS BREWING

Seattle-based Starbucks has returned to financial health after closing stores and slashing costs in 2008 and 2009. Some employees, however, said those fixes eroded the cafe culture that made the company great.

Starbucks is eyeing profit growth through new products like Via instant coffee and by expanding its middle-market Seattle's Best brand in the United States and building new cafes in important international markets like China.

"I am convinced that we are about to enter an era of even more opportunity for Starbucks, and am more convinced than ever that our future has never looked brighter," founder and Chief Executive Howard Schultz said in a statement.

Net income for the fourth quarter ended October 3 rose 86 percent to $278.9 million, or 37 cents per share, handily besting analysts' average call for a profit of 32 cents per share, according to Thomson Reuters I/B/E/S.

Net revenue grew more than 17 percent to $2.8 billion, after global sales at restaurants open at least 13 months rose a better-than-expected 8 percent.

Starbucks has more than 16,000 cafes around the world.

It gets about 75 percent of company revenue from its roughly 10,000 stores in the United States, where it is facing competition from the upscale independent coffee chains at the top of the market and from large companies like McDonald's Corp (MCD.N) and Dunkin' Donuts on the lower end.

(Editing by Edwin Chan, Gary Hill)

Although other data on Thursday showed nonfarm productivity rebounded at a much stronger-than-expected 1.9 percent annual rate in the third quarter, the general tone remained consistent with a sluggish economy.

Initial claims for state unemployment benefits increased 20,000 to a seasonally adjusted 457,000, the Labor Department said, reversing the prior week's decline.

Analysts polled by Reuters had forecast claims rising to 443,000 from the previously reported 434,000. The government revised the prior week's figure up to 437,000.

In a second report, the department said unit labor costs, a gauge of potential inflation pressures closely watched by the Federal Reserve, fell at a 0.1 percent rate after rising a revised 1.3 percent in the second quarter.

"This suggests the labor market is not improving as much as we hoped .... and suggests there hasn't been that much of a change between September and October labor market conditions," said Zach Pandl, a U.S. economist at Nomura Securities International in New York.

Concerns about the lackluster recovery and stubbornly high unemployment prompted the Federal Reserve on Wednesday to announce it would buy an additional $600 billion worth of government bonds by the middle of next year.

The second round of asset purchases is intended to push interest rates further down, thereby stimulating domestic demand, and prevent the current low inflation environment from spiraling into a damaging bout of deflation.

U.S. stock index futures trimmed gains on the claims report, while Treasury debt prices extended gains. The U.S. dollar extended losses versus the yen.

The claims data has little influence on October's employment report due on Friday as it falls outside the survey period. The government is expected to report that nonfarm payrolls increased 60,000 last month, which would be the first expansion since May, after dropping 95,000 in September.

A Labor Department official said there was nothing unusual in the claims data and described the report as fairly clean.

The four-week average of new jobless claims, considered a better measure of underlying labor market trends, rose 2,000 to 456,000.

The rise in productivity in the third quarter, which exceeded economists expectations for a 1.0 percent growth pace, implied little need for businesses to step up hiring.

However, economists say at some point firms will no longer be able to meet demand by making their operations more efficient and will need to increase payrolls.

"The big picture is that firms are trying to squeeze every ounce out of the workers they have and this is one reason they feel no need to hire," said Cary Leahey an economist at Decision Economics in New York.

During the third quarter, hours worked increased at a slower 1.1 percent rate after a 3.5 percent pace in the second quarter.

(Reporting by Lucia Mutikani; Editing by Andrea Ricci)

The decision takes the Fed into largely uncharted waters and is aimed at further lowering borrowing costs for consumers and businesses still suffering in the aftermath of the worst recession since the Great Depression.

The U.S. central bank said it would buy about $75 billion in longer-term Treasury bonds per month through the end of June 2011 and could adjust purchases depending on the strength of the recovery.

"The economy is slowly digging itself out of a deep hole," said Brian Bethune, economist at IHS Global Insight in Lexington, Massachusetts. "The Fed is making the right moves here to nudge the pace up a little," he said.

Critics within and outside the central bank fear the Fed's policy will lead to high inflation and worry that low interest rates in the United States risk fueling asset bubbles in other countries and destabilizing currencies.

But with the U.S. economy expanding at only a 2.0 percent annual pace in the third quarter of this year and the jobless rate seemingly stuck around 9.6 percent, the Fed had come under pressure to do more to stimulate business activity. HIGH

UNEMPLOYMENT, LOW INFLATION

In the Fed's post-meeting statement, policymakers described the economy as "slow" and said employers remained reluctant to create jobs. They also called inflation "somewhat low."

"Progress toward (our) objectives has been disappointingly slow," the Fed said, referring to its dual mandate to maintain price stability and foster maximum sustainable employment.

Still, these domestic goals appeared to be creating troubles abroad. The prospect of ultra-low returns in the United States have driven investors into higher-yielding emerging markets, pushing those currencies higher and sparking anxiety over a loss of export competitiveness.

"We are all under attack by the relaxed monetary policy of the United States," Colombian Finance Minister Juan Carlos Echeverry told investors on Tuesday.

With 14.8 million Americans unemployed, factories operating well short of capacity, and inflation well below the range the Fed would prefer, some officials at the central bank see the risk of a vicious deflationary cycle where consumers hold off on purchases, choking off economic growth.

Fed Chairman Ben Bernanke, in an opinion piece posted on the Washington Post's web site on Wednesday, said policymakers could not sit idly by given the anemic economic backdrop. He argued that fears that unconventional monetary policy would spark a future bout of inflation were "overstated."

"Inflation that is too low can pose risks to the economy -- especially when the economy is struggling. In the most extreme case, very low inflation can morph into deflation, which can contribute to long periods of economic stagnation," Bernanke wrote.

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