The Federal Open Market Committee says the tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally.
It says the action is intended to help forestall some of the adverse effects on the broader economy and Wall Street has greeted the move with a buying spree.
On the New York Stock Exchange, the Dow Jones industrial average closed 336 points higher at 13,739, a surge of 2.5 per cent.
The high-tech Nasdaq composite index jumped 70 points to 2,652.
The British share market closed before the Federal Reserve announcement, but has gained substantial ground in anticipation.
A UK Government decision to guarantee all deposits held by the stricken Northern Rock has also helped investor sentiment.
London's FT-100 index recouped 101 points to 6,282, a gain of 1.6 per cent.
Yesterday, the banking sector dragged the Australian market lower again as the All Ordinaries index fell 76 points to 6,208.
The National Australia Bank (NAB) shares plunged 3 per cent in value to finish at $37.25.
On the Sydney Futures Exchange, the Share Price Index 200 contract closed up 140 points at 6,342, a rise of 2.3 per cent.
The 10-year bond contract was up one point at 94.09 with the implied yield easing to 5.91 per cent.
The Australian dollar has also rocketed higher in response to the US rate cut, at 7:00am AEST it was being quoted at 85.23 US cents, a gain of 2.3 US cents on yesterday's local close.
On the cross-rates, the dollar was buying 60.96 euros, 98.89 Japanese yen, 42.35 pence sterling and against the New Zealand dollar, it was at $NZ1.173.
The gold price rose to $US723.80 an ounce, while the spot price of West Texas crude added another 96 cents to $US81.51 a barrel. © 2007 Australian Broadcasting Corporation
