Stock markets are likely to stay volatile for a number of weeks

The UK's FTSE 100 index closed 2.9% higher after falling more than 4% earlier. France's Cac also bounced back but Germany's Dax closed 0.3% down.

In the US, the Dow Jones and S&P 500 indexes fell, but their declines were less sharp than they had been earlier.

The Fed cut its main interest rate to 3.5% from 4.25% in a surprise move.

It came after global markets suffered their worst day since 9/11 on Monday, and as investors continued to dump shares in early trading on Tuesday.

The fears about slowing global growth were so pronounced that they spread to other asset classes, hurting commodities such as oil and gold.

But most stock market indexes and commodities quickly gained ground after their earlier losses in response to the Fed's biggest interest rate cut in more than two decades.

The UK's benchmark FTSE 100 index of largest shares finished 162 points, or 2.9%, ahead at 5,740.1 and the French Cac 40 index gained 2%, but Germany's Dax failed to make headway, still down 0.3% at 6,769.47.

In the US, shares on the Dow Jones Industrial Average ended the session 1% lower at 11,971.19, while the broader S&P 500 index also shed 1%.

"This major move might seem like a panic response to the plunge in stock prices, but it also makes sense," said Dick Green at Briefing.com.

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But other analysts were less convinced.

"This is a cure for the wrong disease," said Daniel Alpert, managing director of US investment bank Westwood Capital.

"It makes everybody feel good, but it's not going to have any ongoing benefit.

"We need to get ourselves out of a mountain of debt and overvalued properties."

Caution rules

The recent stock market declines came after many investors were disappointed by US President George W Bush's proposed $145bn (£74bn) emergency stimulus plan to boost the economy.

At the same time, banks were reporting increasing losses stemming from problems in the US housing market, and some of the main bellwether companies were not meeting analysts' earnings estimates.

Signs of the tougher economic environment have also been evident in the Christmas corporate trading statements and economic data on both sides of the Atlantic.

Many analysts said that while the Fed's rate cut might help to ease concerns in the short-term, stock markets were set to be volatile in coming weeks.

"Caution still rules the long-term picture," said Markus Steinbeis of Pioneer Investments.

'Remain calm'

Before the Fed's rate cut on Tuesday, stock indexes were under severe pressure.

In Mumbai, India's main stock index the Sensex fell 9.8% within minutes of opening, triggering an automatic one-hour halt in trading.

It later recovered some of its losses to close 5% lower, extending its record one-day fall of 7.4% on Monday.

India's Finance Minister P Chidambaram has urged Indian investors to "remain calm" and advised them to "stay invested".

Mr Chidambaram said that "enough liquidity will be provided to the brokers to tide over the present crisis".

In China, the main Shanghai Composite Index closed down 7.2% at a five-month low, having lost 17% in the past six days of trading.

Trading was also suspended briefly in South Korea, where the market eventually closed down 4.4%, while Hong Kong's Hang Seng index suffered its biggest daily fall, closing down 8.7%.

Global co-operation

Sydney's market continued its longest losing streak for 26 years, closing 7.1% lower.

FTSE 100 - BIGGEST FALLS 20/10/87 down 12.2% 19/10/87 down 10.8% 26/10/87 down 6.2% 11/09/01 down 5.7% 22/10/87 down 5.7% 22/01/08 down 5.5%

The Japanese government said it saw no reason to intervene to support the markets and a Bank of Japan meeting left interest rates unchanged.

Japan's benchmark index, the Nikkei 225, shed 5.7% at 12,573.05, extending its losses since the beginning of the year to 18%.

"Stock markets across the world are falling and it basically stems from the US," said Hiroko Ota, the minister for economic and fiscal policy.

"It is difficult at the moment to mull action by Japan alone. Instead, we should co-operate globally," she said.