European shares dropped sharply Wednesday while Asian shares rose in a volatile market mix as investors digested the U.S. Federal Reserve's surprise interest rate cut aimed at shoring up the sagging American economy.

In Europe, the United Kingdom's FTSE 100 dipped 3.7 per cent to 5,528.7, while Germany's DAX fell 5.4 per cent to 6,401.29.

France's CAC slipped 4.2 per cent to 4,614.04.

The FTSE and the CAC had finished in positive territory Tuesday after the 75 basis point rate cut, but analysts said market swings were expected to linger for some time because the Fed's quick action between scheduled meetings was seen by some as a sign that American authorities view the U.S. credit crunch as a very serious problem.

"The U.S. rate cut will not prevent the U.S. and world markets from slowing or even sliding into recession but it sends a positive signal that the Fed will do all it can do ... to halt the liquidity crunch that is paralysing the financials sector," said Lawrence Peterman, investment director at Eden Financial in London.

On Wall Street, stocks also plunged as investors grew increasingly anxious about the prospect of a recession.

In midday trading, the Dow was down 260.86, or 2.18 per cent, at 11,710.33 after being down as much as 323.29.

Broader stock indicators also skidded. The Standard & Poor's 500 index fell 33.45, or 2.55 per cent, to 1,277.05, and the Nasdaq composite index slid 77.62, or 3.39 per cent, to 2,214.65.

A safer place

Bond prices rose as investors search for a safer place for their money.

Markets in Europe may have taken their cue from a statement from European Central Bank (ECB) President Jean-Claude Trichet that suggested he was sticking with his anti-inflation stance and would not follow the Fed in cutting rates. Lower rates boost stocks.

Trichet said it was his duty to "solidly anchor inflation expectations to avoid additional volatility."

Some analysts think, however, that the global market meltdown and a decelerating economy could finally shake the ECB's steel nerves and see it cut interest rates as soon as the second quarter of this year.

- AP