Europe Markets

European Stocks Rally after Fed Rate Cut

European shares closed higher, with the financial sector advancing strongly, after the U.S. Federal Reserve decided to slash interest rates in order to offer relief to troubled credit markets.

The London FTSE-100 , Paris CAC-40 and Frankfurt DAX surged , as did the FTSE CNBC Global 300 .

U.S. stocks traded higher as Wall Street extended a rally in response to relatively tame inflation data and to the Fed rate cut.

The Bank of England announced it would inject 10 billion pounds ($20 billion) next week into money markets in a bid to bring three-month interest rates down, breathing new life into tight credit markets.

The bank's stance has softened dramatically after the Northern Rock crisis over the past days, when panic-stricken depositors queued in front of the mortgage lender's headquarters for three days to shift their savings to safety.

Depositors' fears were appeased after the government offered to guarantee all the deposits at Northern Rock, which was forced to ask for emergency funding from the Bank of England after the seizing up of credit markets plunged it into a liquidity crisis.

But Mervyn King, Bank of England governor, is likely to face tough questions from British MPs on his handling of the crisis on Thursday when he meets a parliamentary committee.

Also on Thursday, the European Central Bank's Governing council is due to meet, but no decision is expected on interest rates. And after the markets close, ECB President Jean-Claude Trichet is due to hold a speech at a Bundesbank gala dinner.

Northern Rock Sinks Again

Northern Rock shares, which had recovered on Tuesday, took another hit on Wednesday as speculation of a cut-price takeover bid stoked concerns over its future. They closed down 17% after having fallen 20% during the day to the lowest level since the bank was floated 10 years ago.

Economists said the bank had the option of being taken over or merging with a foreign bank, as British banks may be reluctant to touch it.

"The problem of course is that their brand right now has taken quite a hit," Ralph Silva, senior research analyst at Tower Group, told "European Closing Bell."

But overall, the banking sector rebounded in Europe, as two top ratings agencies said most banks in Europe are not likely to be hit very hard by the recent turmoil in credit markets, and the Northern Rock crisis is not likely to spill in the U.K. mortgage sector.

Investors were so bullish that, despite a warning from France's largest bank Credit Agricole that its third-quarter profit would be hit by a 250 million euro ($350 million) charge related to an unauthorized,over-the-limit trade at its New York investment bank subsidiary, its shares still closed over 2%.

In other sectors, oil stocks such as BP, Total and Royal Dutch Shell were among the heaviest-weighted gainers in European indexes, as crude prices soared to record levels.

And Spanish clothes maker Inditex said its first-half net profit rose 33% from the same period a year ago, beating analysts' expectations. Inditex shares finished 7.4% up.