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NEW YORK (Reuters) - Hopes rose on Tuesday that the United States, Japan and Europe will cut interest rates to ease the pain of the financial crisis, and battered U.S. stocks surged 10 percent despite gloomy news on the economy.
U.S. consumer confidence plunged to a record low in October amid signs the economy is sliding into a deep recession, threatening to pull the rest of the world with it.
The Nikkei business daily said the Bank of Japan was considering a 25 basis-point interest rate cut to underpin the economy, pushing the yen down in its biggest one-day decline against the dollar in more than 30 years.
A source informed on the matter told Reuters the BoJ would consider cutting rates at its next policy meeting on Friday but will watch market conditions before making a final decision.
A quarter point cut to 0.25 percent could curb the recent surge in the value of the yen, which in turn helped hammer Japanese stock markets. Nikkei futures jumped 14 percent after the report.
In the United States, the consensus among Federal Reserve watchers is for a half-point cut in rates on Wednesday to 1 percent, the lowest level since June 2004. It has already cut the benchmark federal funds rate to 1.5 percent from 5.25 percent over the past 13 months.
The ECB and Bank of England are expected to cut rates on November 6. The moves would follow a coordinated round of monetary easing from major central banks earlier this month.
Lower interest rates could bolster corporate profits by cutting the cost of borrowing for firms hit by the slowdown.
The Dow and the S&P 500 ended up more than 10 percent, a welcome relief after recent heavy losses.
Japanese stocks had closed 6.4 percent higher on Tuesday after hitting a 26-year low and European stocks ended up 2 percent.
"We've had a heck of a day today," said Peter Kenny, managing director at Knight Equity Markets in Jersey City, New Jersey. "The market is expecting a rate cut here tomorrow and we had the news that the Bank of Japan is going to cut rates to weaken the yen -- the strength of the yen has been causing unexpected problems for global markets," Kenny said.
"And we've had only a handful of up-days in October -- sellers are running out of steam."
A drop in closely watched rates on loans between banks was another hopeful sign, showing central bank efforts to ease the credit crunch are making progress.
In Europe, Iceland hiked interest rates massively in a desperate attempt to defend its currency. The move will help secure aid from the International Monetary Fund, which is also crafting plans for Hungary and Ukraine.
Economic data and U.S. company news were gloomy.
U.S. consumer confidence plunged in October to the lowest in the 40-year history of the survey. Companies slashed jobs and retirement savings evaporated during the month, which has seen huge losses on Wall Street.
"Consumers are completely shut down at this point," said Lindsey Piegza, a market analyst at FTN Financial. "They see no end in sight even with all the actions that the government has taken."
The economy dominates the U.S. presidential election which takes place November 4. Republican presidential nominee John McCain and Democratic candidate Barack Obama traded attacks on each other's tax plans on Tuesday.
Polls show voters trust Obama more on the economy and he leads in national surveys and important swing states.
The current crisis has its origins in the bursting of the U.S. housing bubble and data showed prices of U.S. single-family homes continue to plummet, falling a record 16.6 percent in August from a year earlier.
In the embattled auto industry, General Motors Corp has asked the U.S. government for some $10 billion in an unprecedented rescue package to back its purchase of Chrysler LLC, sources familiar with the talks said.
At least four more U.S. banks signed up for the government's offer of a cash injection as part of a $250 billion bank recapitalization program.
Top U.S. refiner Valero Energy Corp said it would cut spending on expectations of weak demand.
Whirlpool Corp, the world's biggest appliance maker, said it will cut 5,000 jobs.
The world's biggest mutual fund company, Fidelity Investments, said it was reviewing costs and staffing after a report it could cut as many as 4,000 jobs.
Economists expect U.S. GDP figures on Thursday to show a 0.5 percent decline in July-September, according to the median of forecasts in a Reuters poll, and many see that as the start of a contraction lasting at least nine months.
Japan restricted investor bets on falling share prices on Tuesday and its prime minister delayed calling a parliamentary election to concentrate on averting recession in the world's second biggest economy.
Tiny Iceland, a high-profile victim of the global credit crisis, raised interest rates by 6 percentage points to 18 percent. Iceland has been driven close to collapse by bank failures, and the central bank said the rate hike was part of a deal struck with the IMF for a $2 billion loan.
Hungary adjusted its budget forecasts to take account of a possible recession in 2009 and Poland approved a timetable on Tuesday to adopt the euro as ex-communist Europe struggled to contain the spread of the financial crisis.
Governments have agreed to provide around $4 trillion to shore up banks and markets to ease the worst financial crisis in 80 years. The Bank of England said the efforts should calm the banking system but was cautious about the wider economy.
"The instability of the global financial system in recent weeks has been the most severe in living memory," said Deputy Governor John Gieve. "And with a global economic downturn under way, the financial system remains under strain."
Bank of England policy-maker Tim Besley warned that the British economy was set to weaken further and interest rate cuts were not a magic bullet.
Reporting by bureaus in Europe, Asia and the Americas; Writing by Claudia Parsons; Editing by Tom Hals, Gary Hill