European shares jumped nearly two per cent yesterday, led by financial stocks, after a surprise and aggressive US interest rate cut turned widespread losses into gains.
The pan-European FTSEurofirst 300 index ended 1.9 per cent higher at 1,304.37 points, snapping a five-day losing run.
The US Federal Reserve served up an emergency measure, slashing its benchmark interest rates by 75 basis points to 3.5 per cent, the biggest rate cut in more than 23 years.
The rate cut lifted financial shares in particular; the DJ Stoxx European banking index was up five per cent.
"There is hope that the rate cut will help stabilise banks' operational businesses," said Markus Steinbeis, head of European equities at Pioneer Investments.
"I wouldn't overrate it. Caution still rules the long-term picture," he added.
Switzerland's UBS gained 9.2 per cent, Britain's HSBC rose 3.9 per cent, and France's BNP Paribas added 6.3 per cent.
In very volatile trading the index fell as much as 4.4 per cent early in the day to its lowest level since November 2005 at 1,223.36 points, before the rate cut lifted it as much as 2.7 per cent to a peak of 1,314.29 points.
Volumes were high, with 6.4 billion shares traded yesterday, compared with around 5.2 billion on Monday and 4.2 billion on Friday.
Frankfurt's DAX-New Volatility index briefly hit its highest level in nearly five years, having risen almost 90 per cent so far this year.
"The question now is whether the market trusts the Fed to solve the problems in the long term," Mr Steinbeis said.
Mr Steinbeis said investors were shifting from defensive stocks like utilities and telecoms into cyclicals such as retail and technology.
German utilities E.ON and RWE weighed heaviest on the European benchmark index with declines of 4.2 per cent and 5.5 per cent, respectively. Deutsche Telekom fell 3.1 per cent. Together those shares led Germany's DAX 0.3 per cent lower, making it the worst performer among European indexes.
The UK's FTSE 100 index rose 2.9 per cent, and France's CAC 40 added 2.1 per cent.
The Fed's interest rate cut took markets by surprise, ahead of a policy meeting scheduled for January 29-30, and futures markets expect another rate cut at that meeting.
"It shows how strong the Fed's concerns are, if it not only brings the rate decision forward but also cuts rates by 75 basis points. The picture of the US economy remains fragile," Rainer Sartoris, analyst at HSBC Trinkaus said.
Wall Street traded lower, but much less than had been expected, given that US markets had been closed on Monday when European bourses suffered their biggest one-day slide since September 11, 2001.
By 1734 GMT, the Dow Jones industrial average was down 1.3 per cent, the Standard & Poor's 500 Index was down 1.5 per cent, and the Nasdaq Composite Index had shed 2.1 per cent.