LONDON (AFP) - European stock markets closed higher Tuesday, helped by a positive performance in Asia as investors pinned their hopes on another substantial US interest rate cut, dealers said.
Asian and European shares rallied after an overnight rebound on Wall Street on the view the US Federal Reserve will slash lending costs again to prevent the US economy falling into recession.
Dealers said news of a bigger-than-expected drop in new US home sales had raised expectations that the Fed will reduce rates again on Wednesday following last week's steep emergency cut of three quarters of a percentage point.
Most expect another half a point cut although that would take the US back close to its current rate of inflation, raising the question of how much further the central could and should go in the face of rising prices.
Dealers said that while the markets got a boost Tuesday from bargain hunting after recent heavy losses, any disappointment with the Fed could prove costly.
In London, the FTSE 100 index closed up 1.66 percent at 5,885.20 points, in Paris, the CAC 40 index gained 1.92 percent to 4,941.45 points while in Frankfurt the DAX rose 1.09 percent at 6,892.96 points.
The Euro Stoxx 50 index put on 1.08 percent at 3,806.20 points.
Asian markets clawed back some of Monday's heavy losses but persistent worries about the outlook for the US economy capped the rebound. Tokyo rose 3.0 percent, after Monday's slump of nearly 4.0 percent, while Hong Kong advanced 1.0 percent.
On Wall Street at 1605 GMT, the Dow Jones Industrial Average was up 0.26 percent, extending Monday's gains after better-than-expected durable goods orders figures suggested some resiliency in the US economy.
The 5.2 percent rise in orders for big ticket manufactured durable goods in December was well above market expectations.
"This report may suggest more resiliency than expected but the report is just one factor," said Stephen Gallagher at Societe Generale.
Fred Dickson at DA Davidson & Co. said he "wouldn't be surprised to see some modest profit-taking following the Fed announcement as traders sell on the actual news."
After the Fed decision, all eyes will then be on the US January employment data due out Friday as key indicator of the country's economic health.
"This data will be closely scrutinized for signs (of) whether the economy has slowed significantly over the last month," he said.
In London, miners provided support on the view that another US rate cut will keep the all important US economy on track and demand for raw materials strong.
Recovering from Monday's losses, Anglo American rose 5.80 percent to 2,608 pence, BHP Billiton added 3.95 percent to 1,449 pence and Rio Tinto put on 2.66 percent to 4,670 pence. Xstrata advanced 5.89 percent at 3,719 pence.
In Paris, dealers said the key focus remained what the Fed would do on interest rates, adding that anything less than the half point reduction expected could disappoint the markets and spark a sell-off.
The strong US durable goods figures "were a good indicator of the level of investment," said Rene Defossez, economist with investment bank Natixis.
Dealers said Societe Generale, rocked by a rogue trade scandal, jumped 10.42 percent to 78.45 euros on speculation it could be taken over by one of its French peers, among them BNP Paribas, up 2.92 percent to 67.60 euros.
Government officials ruled out any hostile takeover for the bank Tuesday, saying it would remain under French control.
In Frankfurt, property specialist Hypo Real Estate jumped 8.36 percent to 21.38 euros, rebounding after recent heavy losses and on news of a US acquisition.
TUI was up 4.98 percent at 14.75 euros and Lufthansa added 1.86 percent at 16.44 euros after the two companies announced plans for a joint venture low-cost airline.
Elsewhere in Europe, Madrid's Ibex-35 was up 1.69 percent to 13,246.6 points, in Brussels the Bel-20 jumped 2.86 percent to 3,768.41 points, the SMI in Switzerland gained 1.62 percent at 7,704.39 points, the AEX in Amsterdam rose 1.54 percent to 446.08 points and in Milan the SP/Mib rose 0.97 percent to 34,565 points.
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