| NEW YORK
NEW YORK U.S. blue-chip stocks rose on Monday after reversing direction in the last hour of trade as the flight to safety in the short-term Treasury bills flagged, suggesting concerns over the stability of credit markets were receding.
The U.S. Federal Reserve's surprise move on Friday to cut the discount rate on its loans to banks rippled across time zones in Asia and Europe on Monday. Benchmark indexes in Japan and Europe rebounded as investors weighed the chance of more action by the Fed.
World stock markets had fallen sharply in recent weeks as problems in the risky U.S. subprime mortgage sector spread to other markets.
The dollar rose against the yen on Monday, which prompted Japanese investors to buy exporters' shares during Tokyo's stock trading session.
The Nikkei average jumped 3 percent -- its biggest one-day percentage gain in 13 months. The Nikkei soared 458.80 points to end at 15,732.48.
The FTSEurofirst 300 index advanced 0.6 percent to close at 1,481.90.
Still, U.S. short-dated Treasury note prices gained as credit concerns lingered and investors bet that the Fed's action on Friday meant it will cut the fed funds rate target for overnight interbank loans sooner rather than later.
The yield on the one-month U.S. Treasury bill plunged earlier to the lowest level since December 2004.
"People will want to see what the Fed action actually means at the ground level," said Subodh Kumar, chief investment strategist at Subodh Kumar & Associates in Toronto. "The Fed has been hoping that this kind of action would make lenders more comfortable, and if it doesn't then they'll have to look at other measures."
The Dow Jones industrial average rose 42.27 points, or 0.32 percent, to end at 13,121.35. The Standard & Poor's 500 Index edged down 0.39 of a point, or 0.03 percent, to 1,445.55. But the Nasdaq Composite Index gained 3.56 points, or 0.14 percent, to close at 2,508.59.
Heavy equipment maker Caterpillar Inc was up 1.9 percent to $74.05 and diversified manufacturer Honeywell International advanced 2.5 percent to $55.82.
In New York, U.S. crude oil for September delivery fell 93 cents to $71.05 a barrel after forecasts showed Hurricane Dean would bypass the U.S. Gulf of Mexico, where about a third of U.S. oil is pumped and about half of its refining capacity is located.
Markets have been battered over the past month by fears of financial instability following trouble with risky U.S. mortgages and a squeeze on credit.
The problem has not gone away but some investors have begun looking for bargains as prices are lower and central banks including the Fed are making calming moves.
Fidelity International said on Friday, for example, that it was taking advantage of current market volatility to increase exposure to investment grade corporate credit as well as emerging markets.
But even as some stocks that were hammered last week managed gains on Monday, investors were ready to sell others on the first sign of trouble.
Countrywide Financial Corp's shares fell 7.6 percent to $19.81 after The Wall Street Journal reported that the No. 1 U.S. mortgage lender had begun laying off employees at one of its lending units.
News trickling out of the beleaguered mortgage market continued to unnerve investors. Thornburg Mortgage's shares fell 10.2 percent to $13.50 after Chief Operating Officer Larry Goldstone said there was a crisis in investor confidence in the mortgage sector.
BOND YIELDS DROP, YEN FALLS
U.S. Treasury prices rose as lingering credit worries prompted investors to seek the relative safety of government debt as traders positioned for an imminent cut in U.S. benchmark rates.
Benchmark 10-year notes traded 12/32 higher in price for a yield of 4.64 percent from 4.69 percent late on Friday. Bond prices move in the opposite direction of their yields.
Euro-zone government bond yields fell. The 10-year Bund yield fell 1.7 basis points to 4.277 percent.
Japan's yen weakened broadly, continuing to give back some of last week's hefty gains. The Fed's action had jammed the brakes on an unwinding of carry trades in which investors sell low-yielding currencies like the yen for higher-yielding ones.
The dollar gained about 0.5 percent to 114.95 yen from 114.35 late on Friday, while the euro rose 0.6 percent to 155.05 yen from late Friday's level of 154.15. Before the Fed's move on Friday, the yen hit a 14-month peak against the U.S. currency
The euro was little changed at $1.3484.
(Additional reporting by Kristina Cooke, Ellen Freilich,
Gertrude Chavez-Dreyfuss, Robert Gibbons and Frank Tang in
New York, Blaise Robinson in Paris and Eriko Amaha in