UPDATE 4-Russian shares avoid panic, end higher

(Adds closing levels, trader comments)

By Olga Popova and Polina Vorobieva

MOSCOW, Sept 30 (Reuters) - Russian stocks avoided a panic sell-off on Tuesday after authorities took new steps to prevent them from following global indexes and ended the day on positive territory after confidence returned to U.S. markets.

Russia's financial markets watchdog halted trading for two hours and stepped in to cap volatility on Tuesday morning as Russian indexes were poised to follow Monday's biggest ever one-day fall in the Dow industrials.

When trade resumed the key indexes RTS and MICEX briefly fell by as much as 3.5 and 7 percent.

But they started to recover in the afternoon as investors voiced optimism the U.S. Congress will eventually pass a plan to rescue tainted banking assets, lifting the U.S. dollar and oil, a key indicator for the Russian market dominated by oil firms.

The RTS closed 1.48 percent up and the MICEX was up 0.79 percent.

"The kind of panic where you have to sell everything in a fraction of a second is not in evidence," said Alexander Lobanov, Prospekt brokerage head of equity sales and trading.

"The regulator moved quickly and it helped... Many market collapses are self-sustaining, but you can stop the chain reaction by suspending trade," he said.

The RTS index is down more than 50 percent from its May peak and investors had feared a further rout after the U.S. Congress failed to agree a $700 billion bailout for the financial industry.

Other traders also praised Tuesday's actions by financial authorities and called on the government to take new measures. But they added that the idea of emerging markets' decoupling from global stocks seemed remote.

"The panic has been stopped... The patient's death has been postponed. The big question is what's next because we are not trading on our own, we follow the West," said Evgeny Volkov, a trader at MDM Bank.

CAPS ON VOLATILITY

The most heavily traded shares closed mixed, with Gazprom (GAZP.MM) up 2.6 percent and a fellow state energy company, Rosneft (ROSN.MM) down 2.9 percent.

State bank Sberbank led the pack with a gain of 8.68 percent, led by strong banking shares in the United States.