Stock markets around the world continued to rally today after the US Federal Reserve stepped up its fight against recession with an aggressive cut in interest rates.

The FTSE 100 index opened 47.2 points higher at 5653.0 after last night's rally on Wall Street which saw the Dow Jones Industrial Average rise 420.41 to 12,392.61. Shares in Asia and across Europe were also on the rise today.

It followed a dramatic night in Washington where the Fed, led by chairman Ben Bernanke, cut rates by three-quarters of a percentage point to 2.25% - the lowest since February 2005. The cut was not as much as the 1% many in New York had hoped for but it was enough to send shares soaring. The S&P 500 recorded its best gain since October 2002.

Claire Collingwood, a trader at CMC Markets in the City, said: "The fact the Fed cut rates by just 75 basis points last night - less than the 100 points that had been expected by a number of traders - did leave equities under a degree of pressure in the short-term, but the negative sentiment didn't last long and Wall Street promptly resumed its rally. As a result, the upward momentum continued in Europe this morning."

The Footsie crashed more than 200 points on Monday to its lowest for two-and-a-half years following the collapse and bailout of Bear Stearns. It recovered most of those losses yesterday and added to the gains today. Bear Stearns was brought to its knees as the credit crunch deepened and lending between banks dried up.

The Fed took emergency action over the weekend to save the bank - resulting in its firesale to JPMorgan Chase - and followed that up with last night's rate cut. It has now reduced rates from 5.25% to 2.25% in the last six months as it attempts to ease the liquidity freeze crippling the markets and resuscitate the ailing economy.

The recession in the US has threatened the health of the British economy and the Bank of England is under growing pressure to cut interest rates. The credit crunch has hit the housing market as banks and building societies tighten mortgage lending conditions.

With inflation at a nine-month high of 2.5%, and rising, the Bank has less scope than the Fed for big rate cuts.

The dollar and pound dropped against other currencies. The dollar edged higher today. New York officials are probingwhether Bear Stearns deceived markets by manipulating its stock price.