Stock markets soared out of the gate on Tuesday after China slashed interest rates, but the gains were short-lived as the two biggest American stock indices were in the red by the end of the day.

The Dow Jones Industrial Average, a collection of 30 blue chip companies, closed down 205 points at 15,665 after spending much of the day in positive territory before selling off at around 3 p.m.

The broader S&P 500 index was also lower, down 25 points to 1,867.

The TSX was the exception in North America with Canada's benchmark stock index closing up 98 points to 13,150.

The Canadian dollar was also lower, shedding about half a cent to trade below the 75 cents US level for the first time since 2004. The loonie took its lead from oil, which stayed below the $40 US level for the third straight trading day.

European markets recovered almost all their losses from Monday, with most rising at least four per cent, while China's main index slumped again largely because the interest rate move came after the trading floor had closed up shop for the day.

Hours after China's Shanghai stock index slumped to close 7.6 per cent lower — adding to Monday's 8.5 per cent loss and taking the benchmark to its lowest level since Dec. 15 — the central bank swung into action.

It cut its interest rates for the fifth time in nine months in a renewed effort to shore up economic growth. The central bank lowered the benchmark rate for a one-year loan by 0.25 percentage points to 4.6 per cent and the one-year rate for deposits by a similar margin to 1.75 per cent.

The bank also increased the amount of money available for lending by reducing the minimum reserves banks are required to hold by 0.5 percentage points.

Analysts say that while Tuesday's actions by the central bank may calm the stock market turmoil for now, the country faces a long period of uncertainty that will create more volatility.

"Value hunters ... are slowly moving into the market as valuation levels now seem reasonable," said Terry Sandven, chief equity strategist at U.S. Bank Wealth Management in Minneapolis.

"What we need to see to calm investors is positive economic data points out of China and only when we see that will the rallies be sustainable," said Xavier Smith, investment director at Centre Asset Management.

"Right now, it's pretty meaningless," he said of the interest rate cut.

Tokyo's Nikkei 225 earlier closed down 4 per cent after sliding 4.6 per cent Monday.

But other markets in Asia posted modest recoveries. Hong Kong's Hang Seng index rose or 0.7 per cent, while Sydney's S&P ASX 200 gained 2.7 per cent and Seoul's Kospi index and Singapore's Straits Times index also rose.

In morning trading in Europe, France's CAC-40 jumped 4.3 per cent after tumbling 5.4 per cent Monday while Germany's DAX was up 4.1 per cent after dropping 4.7 per cent the day before. Britain's FTSE 100 was 3.3 per cent higher.

Wall Street had a stomach-churning day Monday, when the Dow plunged more than 1,000 points at one point before finishing down 588.40 points, or 3.6 per cent, at 15,871.35. The Standard & Poor's 500 index slid 77.68 points, or 3.9 per cent, to 1,893.21, and is now in "correction" territory, Wall Street jargon for a drop of at least 10 per cent from a recent peak. The last market correction was nearly four years ago.

Craig Alexander, vice president of economic analysis at the C.D. Howe Institute, said global markets are trying to weigh the impact of China's economic slowdown, itself an unknown quantity as economists do not trust official figures.

"What investors are trying to figure out is which countries export the most to China and are going to be negatively affected by the slowdown in China," he told CBC News.

"They're trying to figure out which economies are vulnerable because they have imbalances like China and are too dependent on foreign capital. And there is this added worry that at some point the Federal Reserve may raise interest rates."