Australia's bold interest rate cut also boosted European markets in overseas trading Tuesday.

Stock markets in England, France and Germany all rose in anticipation that the Australian government's move — to cut borrowing charges by one full percentage point — would be the first in a string of central banks to chop rates.

The U.K.'s main index — the FTSE 100 — rose almost 1.5 per cent, or 68.49 points, to 4,657.68 in trading Tuesday.

France's CAC 40 also traded higher, up 1.63 per cent, or 60.69 points, to 3,772.67. And the DAX, Germany's bellwether investment index, rose by a lesser amount, 0.39 per cent, but was still 20.87 points higher, reaching 5,407.68 points.

On Tuesday, the Reserve Bank of Australia cut its key rate by one full percentage point to six per cent. Analysts were surprised by the move because they had expected only a half-point cut.

Central bank tango

Now economy watchers expect that other central banks will follow Australia's lead.

The Bank of England, for instance, has begun two days of meetings, at the conclusion of which the U.K. central bank is expected to lower the interest rate from the current five per cent.

In this country, Scotiabank is forecasting that the Bank of Canada and the U.S. Federal Reserve will slice their borrowing rates by 100 basis points, or one full percentage point, in the near term.

The rate-setting committee of the American central bank is scheduled to meet on Oct. 28 and 29, while the next monetary policy decision by Canada's central bank is expected on Oct. 21.

Financial gloom

Tuesday's performance by stock markets in Europe represented a marked improved over the carnage that occurred on global exchanges Monday.

All major North American, European and Asian markets dropped substantially in value as financial institutions in continental Europe and England began to fail commercially because of now-worthless asset-backed commercial paper holdings.

In the past few weeks, the governments of the United Kingdom, Iceland, France and Germany, among others, have been forced to come to the aid of a variety of banks and insurance companies because of the spreading global financial crisis.

In the latest move, the government of Iceland took control of the country's second largest bank — Landsbanki — after its Icesave subsidiary stopped withdrawals by depositors, a sure sign of the financial institution's looming insolvency and a move also likely to produce panic among its customers.

Perhaps equally troubling for European banks, lending institutions in the United Kingdom met with British Chancellor Alistair Darling on Monday to formulate plans for government financial assistance in return for stakes in the private sector firms.

As a result, shares in the Royal Bank of Scotland were down 17 per cent, HBOS were off 14 per cent, Lloyd took an 11 per cent financial haircut in trading while Barclays lost five per cent of its market capitalization.