European shares end up more than three per cent ahead of Fed

European stocks jumped more than three per cent yesterday as hopes for a steep US rate cut and above-forecast results from Goldman Sachs and Lehman Brothers provided some relief to battered financials.

By midday yesterday European stocks jumped, recouping some of the previous session's sharp losses on hopes that the US Federal Reserve would deliver a big interest rate cut and the global credit crisis would ease. Better-than-feared quarterly results from Wall Street firms Goldman Sachs Group Inc and Lehman Brothers Holdings Inc also helped soothe investors' worries over the impact of the crisis on banks' books.

The FTSEurofirst 300 index unofficially closed up 3.4 per cent at 1,240.3 points but this was not enough to recoup all of the previous day's 4.4-per cent loss. The index sank 4.4 per cent on Monday after the fire sale of struggling Wall Street firm Bear Stearns raised concerns about valuations in the banking sector and sparked fresh nervousness over the credit crisis.

The rebound was led by recently battered banking shares, with UBS - a major victim of the credit crunch - rallying more than 14 per cent and HSBC jumping more than seven per cent.

Nearly all US primary dealers now believed that the Federal Reserve would cut key short-term rates by at least three-quarters of a percentage point yesterday, in the wake of Bear Stearns' near collapse. Fed fund futures showed a 94 per cent chance of a percentage point cut.

Around Europe, Britain's FTSE 100 rose 3.5 per cent and Germany's DAX and France's CAC 40 gained 3.4 per cent.