Rate concerns

Investors indicated that they believe much more needs to be done by the US central bank to shore up the US economy, which some see as on the brink of recession, having been hit by a slumping housing market and tight credit conditions.

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On Tuesday, the Federal Reserve cut its key federal funds rate by 75 basis points, the largest cut in more than 23 years, to 3.5 per cent.

The cut was made a week before its scheduled meeting, underscoring the risks facing the US economy.

However, the feeling in European stock markets was that Europe's central banks would not follow suit.

Comments by Jean-Claude Trichet, the European Central Bank (ECB) president, that the ECB needed to stay focused on fighting inflation in the face of a very significant market correction appeared to support this view.

Confidence shaken

After rising as much as 1.6 per cent, the FTSEurofirst 300 index of top European shares reversed direction on Wednesday and fell 1.7 per cent with Germany's DAX falling 2.7 per cent and the London's FTSE down 1.5 per cent.

Meanwhile, in New York the Dow Jones was also significantly down after early trading on Wednesday.   

Earlier in Asia there had been a two per cent rebound for Japan's benchmark Nikkei and a 10.72 per cent rise in Hong Kong's Hang Seng Index.

For many analysts, the scale of the Federal Reserve's move seemed to have shaken confidence in the system.

Eugen Weinberg, at Commerzbank in Germany, said: "The Fed's move implied that the problems in the system are much worse than we expected."