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The US Federal Reserve has cut rates by 0.75 per cent after an emergency meeting.

The cut is seen as a reaction to the recent falls on stock markets around the world – in turn prompted by fears of a US slowdown.

The 75 basis point cut – the largest in almost 26 years and larger than the response to September 11th, 2001 - from the rate-setting federal open market committee puts the US base rate at 3.5 per cent.

A statement said the committee cut rates "in view of a weakening of the economic outlook and increasing downside risks to growth".

It added, that while the tightening of lending following the subprime loss-fuelled credit crunch had eased somewhat, "broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households."

The body also predicted a further slowing of the US housing market and well as "some softening" in the labour market.

The committee concluded: "Appreciable downside risks to growth remain."

After widespread falls on stock markets across the world, the US rate cut boosted equities across Europe – with the Paris CAC 40 and Frankfurt DAX both up.

The FTSE – which had already bounced after initial falls – also rallied on the rate decision, but has fallen since.

Graham Wye, at the Centre for Economics and Business Research, said: "The markets are on the bounce following the surprise 75 basis point cut by the Federal Reserve today, eight days prior to their scheduled meeting.

"Concern had been growing of forced sales, if the monolines – insurance taken against bond defaults - were downgraded.

"This issue had the potential to dwarf the market losses following the credit crunch, encouraging the Fed to take swift and decisive action."