Fed rushes to the rescue, Europe tries to reassure

BRUSSELS (Reuters) - A shock U.S. interest rate cut failed to halt a stock market rout on Tuesday as fears of a U.S. recession forced policymakers in Europe and Japan to issue rapid reassurances about the health of their economies.

The Federal Reserve cut its key interest rate by three-quarters of a percentage point to 3.5 percent, its biggest in more than 23 years. But markets paused only momentarily before the selling wave renewed as investors seem fixated on the idea that the U.S. will drag the world economy down.

"Incoming information indicates a deepening of the housing contraction as well as some softening in labor markets," the Fed said. Canada's central bank cut too.

U.S. Treasury Secretary Henry Paulson said he was confident in the resilience of the U.S. and global economies and welcomed the Fed cut as a helpful move.

"This is very constructive and I think it shows this country and the rest of the world that our central bank is nimble and can move quickly in response to market conditions," Paulson said.

The White House, rushing to put together a $150 billion stimulus package to prop up an economy ravaged by a housing slump and a mortgage defaults crisis, declined immediate comment on the Fed cut.

President George W. Bush was set to meet members of Congress later in the day to discuss the economic rescue package.

Outside North America, politicians and central bankers said the market selloff looked excessive. But they had their work cut out to convince as people like billionaire investor George Soros, who said the world faced a financial crisis worse than any since World War Two.

The message sounded more strident in Europe than Japan but the common theme was: don't panic.

"There are no signs of a recession in Germany and that's also the case for Europe," German Chancellor Angela Merkel said.

In an interview with German TV to be broadcast later, she called Europe an "anchor of stability" in the world.

France sought to put a possible recession in the United States into perspective, saying Europe trades just as much with other parts of the world, above all with the countries of the euro zone and 27-country European Union.

"Even if the United States goes into recession ... it's not a tragedy in itself," Economy Minister Christine Lagarde said.

She and other European finance ministers meeting in Brussels said Europe's economy was fundamentally sound and should in no way be grouped with the U.S. economy, hit by a housing slump and a debt default crisis in the subprime mortgage market.

"We feel comfortable with our economic situation at the moment. The economic situation in Europe seems to be uncoupled from the situation in the U.S.," said Luxembourg Prime Minister Jean-Claude Juncker, who chairs meetings of euro zone finance ministers and acts as their chief spokesman.

TOKYO TRIES IT TOO

In Tokyo the central bank chief called for people to look beyond short-term market gyrations.

After the Bank of Japan kept interest rates on hold at its meeting on Tuesday, bank governor Toshihiko Fukui stuck to the line that a favorable long-term growth outlook trumped day-to-day market mayhem when setting rates.

"Our mid-term review showed that the economy is weaker in the near term than what we had projected in October while consumer prices are higher than forecast," Fukui said.

"But in next fiscal year (from April) both are expected to be in line with what we had forecast. Thus, we think the most likely scenario remains that the Japanese economy will keep expanding gradually under price stability," he said.

While the Europeans and Japanese were speaking, shares from Sydney to London sank, dragging commodity prices with them as investors dumped assets exposed to the risk of a global economic slowdown.

U.S. stocks, untraded on Monday when markets fell in other regions, slid sharply on Tuesday.

The routine meeting of finance ministers in Brussels was attended by European Central Bank President Jean-Claude Trichet and International Monetary Fund boss Dominique Strauss-Kahn.

Trichet offered no comment but ECB executive board member Juergen Stark echoed calls for composure.

"The markets are very nervous. They get new information every day and are very sensitive to it, perhaps excessively so," Stark told Germany's Deutschlandfunk radio.

"This high volatility that we see is certainly not helpful but on the other hand, one should not exaggerate events."

Despite Europe's message that it was no longer so reliant on the U.S. as a buyer of its goods the notion that the rest of the world has "decoupled" from the largest economy is not universally shared.

China's central bank last Sunday poured cold water on the idea that the country's economy can decouple from the United States.

China's exports would be badly hit if U.S. consumption slid, Zhang Tao, deputy head of the international department of the People's Bank of China, told a financial forum.

(with reporting by staff in Brussels, Krista Hughes in Frankfurt, Thorsten Severin in Berlin, Francois Murphy in Paris, Leika Kihara in Tokyo and Langi Chiang in Beijing)