Big U.S. rate cut soothes global stocks

By Pedro Nicolaci da Costa

NEW YORK (Reuters) - The Federal Reserve's biggest interest rate cut in over two decades cushioned a plunge in global equity markets on Tuesday, but U.S. stocks still traded lower after Europe closed with solid gains.

The U.S. central bank sought to ease market worries after dramatic losses the day before and early Tuesday linked to fears of a spreading U.S. recession and tight credit.

The Fed slashed key interest rates by three quarters of a percentage point to 3.5 percent, marking the first such cut between regularly scheduled meetings since just after the September 11, 2001 attacks on the World Trade Center.

"It's the Fed coming to the realization the economy is moving lower, quicker, that the credit environment has not been fully flushed out," said Joseph Battipaglia, market strategist at Stifel Nicolaus. "It's not going to necessarily turn this market around."

In reaction to the Fed, bond prices jumped sharply, with two-year notes falling to their lowest in nearly four years, as investors prepared for still more rate-cutting. Bond prices rise as rates fall.

Investors remained sceptical whether the actions would be enough to prevent a worsening U.S. economic outlook and a steep retrenchment in corporate profits, even after U.S. equities recovered significantly from the day's worst losses.

The Dow Jones industrial average was down about 132 points or 1.13 percent, while the S&P 500 fell 17 points or 1.29 percent. But the market recovered from a much steeper early sell-off that took the Nasdaq down as much as 5 percent and shaved 450 points from the Dow.

European markets, meanwhile, recovered sharply after wide losses starting on Monday when U.S. markets were closed for the Martin Luther King holiday. The pan-European FTSEurofirst 300 index ended 1.9 percent higher at 1,304.37 points, snapping a five-day losing run.