"We have stripped the three main banks from the index. Earlier they accounted for 75 per cent of the index," Kristin Johannsdottir, an exchange spokeswoman, said.

"When not included, the index is mechanically down to 25 per cent of its previous value."

Asian rally

The gains in Europe's major indices came after Asian stock markets rallied for a second straight day following schemes by Western governments to give cash to ailing banks in an attempt to encourage bank-to-bank lending.

The Japan's Nikkei index closed 14.15 per cent up on Tuesday, its biggest-ever gain in a single day's trading.

Tuesday's gains erased most of the losses the Nikkei took on Friday and went some way towards reversing the 24 per cent plunge it has suffered over the course of the week.

Hong Kong's Hang Seng index closed 3.2 per cent higher while Australia's benchmark S&P/ASX 200 index climbed almost six per cent before paring some gains.

All bank deposits in Hong Kong will be fully guaranteed until 2010, John Tsang, the territory's financial secretary said on Tuesday.

Australia's government unveiled a A$10.4bn ($7.3bn) emergency stimulus package on Tuesday to guard the country's economy from a global recession.

The move to make one-off state payments to low-income earners and pensioners came two days after the government guaranteed all bank deposits for three years.

It also made wholesale funding to Australian banks to protect them from the fallout from the global credit crisis.

Dow rallies

Share prices in China, South Korea, Singapore, Taiwan and New Zealand were sharply higher on Tuesday, following Wall Street's overnight rally.

Gulf markets recorded intial gains in
Tuesday trading [AFP]
Arab stock markets also rose on Tuesday, with emirate Dubai gaining nine per cent at the opening of trade and Abu Dhabi and Oman each gaining six per cent.

The jump in Gulf markets came after the United Arab Emirates announced that it had set aside $19bn for local banks to encourage bank-to-bank lending and stave off a credit freeze.

The funds bring the total amount set aside by the UAE in the last month to prop up banks to $32.6bn.

The Dow Jones index of leading US shares saw its highest single-day surge in 76 years on Monday, closing 936.42 points, or 11.08 per cent, higher to end eight straight sessions of losses.

Al Jazeera's Rob Winder, reporting from the trading floor on Wall Street, said people were cheering and punching the air as the closing bell sounded.

But while the mood seemed generally positive, analysts said there was a long way to go before the market rally could be described as a recovery, and the mood on the trading floor seemed to reflect that, our correspondent said.

Ammar Sankari, a financial expert who works on the NYSE, told Al Jazeera that the reason for the rally was that "some investors see that stock has reached attractive levels and that now is the time to buy in".

"It will move a little higher, but you won't see it moving up to around 10,000 points for some time. We need to see practical moves and hear that banks are lending again," he said.

Government intervention

The markets' surge follows co-ordinated moves over the weekend by European nations including the UK, France, Germany and Italy, to firm up banking systems.

Europe's rescue-package breakdown

Germany: Up to 400bn euros ($543bn) in guarantees for banks, up to 80bn euros ($109bn) to recapitalise banks and 20bn euros ($27bn) to back up the guarantees.

France: Up to 360bn euros ($489bn), including 320bn euros ($435bn) to guarantee bank refinancing and another 40bn euros ($54bn) for a government-backed agency to provide banks with extra capital.

Spain: Will guarantee up to 100bn euros ($136bn) in bank bond issuance this year after 30bn euros ($41bn) promised last week for bank capitalisation.

Austria: Up to 85bn euros ($115bn) in guarantees, and an additional 15bn euros ($20bn) in capital.

Netherlands: Will guarantee up to 200bn euros ($272bn) in inter-bank loans, on top of what it pledged for bank capitalisation last week.

Portugal: Announced on Sunday it would guarantee 20bn euros ($27bn) in inter-bank loans - nearly 12 per cent of annual economic output.

Britain: Announced on October 8 a 50bn-pound ($87bn) plan to partly nationalise major banks and promised to guarantee a further 250bn pounds of bank loans. Up to 37bn pounds ($64bn) to boost balance sheets at three of Britain's largest banks unveiled on Monday.

Norway: Outside the euro zone and the EU, Norway plans to offer new government bonds worth 350bn kroner ($56bn) to banks to help improve liquidity in the market.

George Bush, the US president, on Monday welcomed "the bold and specific follow-up actions by European nations".

"The United States is also acting, and we will continue to implement measures ... to help banks gain access to capital, to strengthen the financial system and to unfreeze credit markets and restore confidence in the financial system," he said.

Neel Kashkari, the official in charge of the country's $700bn rescue package, announced US government plans later on Monday to buy stakes in a "broad array" of banks.

Bush is due to make a public announcement on Tuesday after meeting Henry Paulson, the US treasury secretary.

Paulson will also announce details of "a series of comprehensive actions to strengthen public confidence in our financial institutions and restore functioning of our credit markets", his department said.

Jamie Chisholm, a journalist for the Financial Times, said it appeared that the immediate banking crisis had been stemmed, following Europe and Asia's strong stock market performances on Tuesday. 

"We have killed the virus, but the problem now is that we have to deal with the infection. The infection is the effect that all this has had on Main Street; people who go about their daily lives [and] businesses who make and produce things," he told Al Jazeera.

"We are going to be faced with at least a downturn, maybe a recession, possibly a technical global recession. Once this market bounce has sorted itself out, the markets will look to that [possibility]."

"This sort of [crisis] has not happened to such a degree in the past - everyone gives the example of the 1930s but this is very different from then."

Walden Bello, a senior analyst and former director of Focus on the Global South, said that a complete overhaul of the global financial system was needed to restore people's trust in it.

"I think we are talking about drastic overhauling and the reinstitution of capital controls. The lifting of those controls between countries and financial sectors has been one of the causes of this financial mobility that has brought us 100 crises over the past 25 years," he told Al Jazeera.

"I think we are going to be talking about severe regulation of the banking sector. Among this will be the banning of trading in derivatives, which Warren Buffet [an American investor and businessman] has called a financial means of mass destruction.

"I think we need to bring a whole new social criteria, in terms of lending and financial operations, [which] will mean channelling money into health and things like that."