LONDON - EUROPEAN and Asia stocks made further ground on Wednesday as investors counted on a round of global interest rate cuts but Wall Street opened lower a day after a huge bargain-hunting rally.

The US Federal Reserve was on later Wednesday expected to slash US borrowing costs to boost the flagging US economy, with the European Central Bank likely to follow suit next week.

The Dow Jones Industrial Average fell 0.77 per cent to 8,995.66 points in opening trade and the Nasdaq dropped 16.27 points (0.99 per cent) to 1,633.20.

On Tuesday, the major indices skyrocketed as investors sought bargains after days of massive losses.

In mid-afternoon European trade, the London FTSE 100 index was up 5.62 per cent and the CAC 40 in Paris rose 7.17 per cent.

But in Frankfort the DAX dropped 1.31 per cent as Volkswagen shares fell hard after two days of major gains on news that Porsche had boosted its stake in Europe's largest car marker.

Earlier on Wednesday, Tokyo shares rocketed 7.74 per cent as the expected US rate reduction and hopes of a similar move in Japan lifted Asian markets.

Sydney rose 1.3 per cent, Mumbai was up 0.4 per cent and Hong Kong finished 0.8 per cent higher.

'Talk of rate cuts is boosting sentiment, with many expecting a cut of at least 50 basis points that would take interest rates in the United States down to 1.0 (per cent) for the first time since 2004,' said CMC Markets dealer Ian Griffiths.

'However, many are still sceptical after such huge moves ... there is no doubt that all eyes will be on the (Fed) ... and anything less than the expected 50 basis point rate cut could plunge these markets back to were they started (on Tuesday).'

NAB Capital analyst John Kyriakopoulos also pointed to a 'thawing' credit freeze that he said had overshadowed gloomy macroeconomic reports, notably sharp declines in US and French consumer confidence.

'It appears that expectations for imminent interest rate cuts by the major central banks and some signs that the credit freeze is thawing overwhelmed more bad news on economic growth.

'Central banks around the world are now taking more decisive monetary policy action to cushion the slump in economic activity,' he said.

Nordic stock exchanges rose sharply. Copenhagen gained 5.49 per cent, Stockholm advanced 4.55 per cent and Helsinki was up 4.66 per cent.

Most stocks in the Gulf region also closed higher as positive sentiment appeared to be slowly returning on the back of a the wider rebound.

Some analysts expressed surprise at the sharp upturn in equities, saying that bargain hunting and a massive buying rush by 'short sellers' who had bet on lower prices helped fuel the advance.

Other experts have warned the expected Fed rate cut would be largely symbolic because the actual rates on overnight interbank loans are already below the Fed benchmark following extraordinary efforts to pump liquidity into a strained banking system.

'Although it's too early to celebrate, traders are seeing signs that the credit market, which earlier this year paralysed the stock markets, is easing up,' said Mr David Evans of BetOnMarkets.

'While we are not certain if this is the bottom of the barrel, what we are certain of is that volatility will continue.'

The Nikkei business daily said on Wednesday that Japan's central bank was considering cutting its already super-low interest rates by 25 basis points to 0.25 per cent on Friday - the first such move since March 2001.

Analysts said a rate cut in Japan now seemed likely and markets would be disappointed if the BoJ does not act. -- AFP