While London and other European equity markets moved sharply higher as a result on the Fed action, the rally quickly dissipated as dealers digested the move.
In a statement, the Fed said: ”The Federal Open Market Committee took this action in view of a weakening of the economic outlook and increasing downside risks to growth.
Down as much as 240 points after it opened, the FTSE 100 rallied more than 100 points just after the Fed announcement. However, the rally quickly ran out of steam, and the FTSE was last down 33 points at 5,544.8, with other European markets also lower.
With less than an hour to go before Wall Street opened for business following its holiday on Monday, Dow futures were down almost 500 points.
The last time the Fed cut rates by as much as 75 basis points was in 1982, when rates were cut by 100b p overnight, while the central bank also brought rates down gradually from 11.5 per cent to 10 per cent in 1984.
Some dealers also speculated that there could be a further 50 basis point cut next week.
The Fed cut came after Asian markets overnight suffered the biggest falls in more than eight years in response to the sharpest slides in European indices since the 9/11 attacks on New York more than six years ago.
While Japan’s Nikkei 225 lost 5.7 per cent to 12,573.1, an 8.6 per cent slide on Hong Kong’s Hang Seng index to 21,757.6 constituted the index’s worst two-day fall since the aftermath of the 1997-98 Asian financial crisis.
Australia’s S&P/ASX 200 recorded its biggest slide since the index was launched in 2000, closing 7.1 per cent lower.
Monday’s sell-off was triggered by concern about the prospect of a US recession and more fall-out from credit market turmoil.
Ian Scott, strategist at Lehman Brothers, said the market was pricing in a severe slowdown in the global economy
On the London Stock Exchange, there was some relief for the under-pressure banking sector, with HBOS up 5 per cent to 640½p, Lloyds TSB 4.6 per cent higher at 390¾p and Royal Bank of Scotland up 2.6 per cent at 351p.
Asset manager Schroders rose 5.6 per cent to 985½p and inter-dealer broker ICAP gained 4.3 per cent to 610p.
Housebuilders also fared better, with Taylor Wimpey up 6.8 per cent to 196.1p and Persimmon 4.4 per cent higher at 792p
However, mining stocks were among the worst performers on fears of a US recession. Rio Tinto lost 2.5 per cent to £41.25, Xstrata fell 1.6 per cent to £30.26 and Vedanta Resources was down 1.3 per cent to £15.70.