US shares rebound drives markets

European traders are still anxious about events in the US

US shares clawed back almost all of Tuesday's heavy falls, with the Dow Jones index gaining 1.9% as investors looked to pick up bargains.

Increased hopes that the Federal Reserve would cut interest rates also buoyed investors, analysts said.

European shares also ended higher after a day of mixed trading as US housing and credit woes continued to gnaw.

The UK's FTSE 100 closed 0.5% ahead at 6,132.2 while Germany's Dax was 0.1% up after trailing for most of the day.

Meanwhile, France's Cac-40 index gained 0.84%.

Earlier on Wednesday, Japan's main Nikkei index closed down 275 points, or 1.7%, at 16,013.

Rate cut hope

The Dow Jones ended up 247.4 points at 13,289.3 on Wednesday, having closed 280 points, or 2.1% down, on Tuesday.

Meanwhile the Nasdaq added 2.5% to 2,563.16.

Analysts said that investors hoped the volatility on global markets would be eased if, as many expect, the US Federal Reserve cuts interest rates next month.

"The market is a little oversold, and bargain hunters are coming into the equation," said Weeden & Co strategist Steve Goldman.

We need more momentum...in order to start reversing some of yesterday's awful losses Peter Dixon Analyst, Commerzbank Market jitters and your wallet

"The market is also getting closer to when the Fed will lower rates."

Tuesday's fall came after another warning about the impact of the problems in global credit markets - centred on the crisis in the US sub-prime mortgage sector - from investment bank Merrill Lynch.

The bank downgraded its opinion of stocks in three firms exposed to the sub-prime sector - Bear Stearns, Lehman Brothers and Citigroup.

"We need more momentum I think in order to start reversing some of yesterday's awful losses," said Commerzbank economist Peter Dixon.

The sub-prime mortgage sector gives higher risk loans to people with poor credit histories.

Sub-prime default levels have risen to record highs in the US over the past year in the face of higher mortgage rates.

This has raised fears that this could hamper credit availability in the broader market, not just in America, but around the world.

On Wednesday, Australian-run investment fund, the Basis Yield Alpha Fund, became the latest victim of the housing slump.

It filed for bankruptcy protection in the US after suffering heavy losses as a result of defaulted payments.