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A surprise 100 basis points interest cut by the Australian central bank, its biggest reduction in 16 years, spawned anticipation in markets that other countries might soon follow suit to try to end the global financial turmoil.

Investors across Asia took heart, erasing some of the earlier losses that dragged down shares from Sydney to Seoul to Shanghai.

Glenn Stevens, the Governor of the Reserve Bank of Australia, cautioned that the percentage point cut — twice the size analysts had expected — to 6 per cent was justified, given the severe deterioration in the outlook for global growth and the sharp rise in funding costs for banks.

While he said such moves should not be the norm, he left the door open to further easing in coming months.

The Bank of England's Monetary Policy Committee is widely expected to cut borrowing costs on Thursday and investors are pricing in similar moves by the US Federal Reserve and the European Central Bank soon.

Ashley Davies, currency strategist with UBS in Singapore, wrote in a note: “The key issue is coordination of policies, since individual country policies aimed at shoring up confidence of domestic institutions can actually exacerbate systemic risk by altering relative risk between countries.

“As such, a coordinated global approach by the major financial powers may be critical to containing the destructive aspects of global deleveraging."

Investor hopes that the Australian move could be a prelude to a unified international response to the crisis helped markets to steady in Asia. Equities rallied with the MSCI Asia ex-Japan stock index gaining 1.4 per cent.

Much of Asia fought back, seizing on the glimmer of hope from Australia.

Australia’s benchmark S&P/ASX 200 index leapt 2.3 per cent after starting the day in negative territory and dipping to a three-year low.

South Korea’s Kospi clawed its way back from its lowest close in 21 months on Monday to trade up 0.5 per cent. The country’s regulator said it was considering steps to reduce volatility and that helped to stem losses.

Some of the biggest worries cames from falls in the currency, which lost 5.7 per cent to plumb a seven and a half year low against the dollar amid fear about the ability of Asia’s fourth-largest economy to weather the storm. One analyst said: “The problem is that nobody knows where the won will stop falling.”

Hong Kong markets were closed for a holiday.

In Shanghai, bank shares rebounded amid speculation that Central Huijin, a government investment fund, could step in to resume buying. The Shanghai Composite Index, which tumbled 5.23 per cent on Monday, ended Tuesday morning down 1.66 per cent at 2,137.738 points after dipping as much as 4.64 per cent at one stage.

The gloom over whether the markets have yet to reach bottom and a possible global recession is round the corner still hung over Tokyo.

The Nikkei was down 1.3 per cent, recovering from a slide of as much as 5 per cent to fall below 10,000 for the first time since 2003.

The fear dragging down the rest of the world was palpable. Koichi Ogawa, chief portfolio manager at Daiwa Asset Management, said: “The market’s been in a panic situation since last week, and a lot of people are moving into cash. It’s really not moving on sense, there are a lot of people who may have no choice but to sell.”

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