Financial markets were laced with caution yesterday as investors refused to take too much hope from Friday's move by the US Federal Reserve to calm the subprime storm.

US stocks were sluggish, even though shares in Europe and Asia made some progress.

The Iseq index in Dublin climbed for the third consecutive day, rising as much as 1.8 per cent before falling back to close up 0.5 per cent.

Dublin traders said that for the first time this summer the index had had a day that could be described as typical for August.

"Volumes were light and things felt steadier than they have for a while," said one, although he was quick to point out that this does not meant the volatility is over. "We are still taking our lead from what happens in the US, and at the moment, they are heading downwards."

Trading in the financials was light, although they were all gainers, with Bank of Ireland leading the way and closing up 1.6 per cent, at €13.30.

Anglo Irish Bank, the busiest of the banks, added 1.3 per cent, to close at €13.98, while AIB closed 0.7 per cent higher, at €18.78.

The busiest of the Irish stocks however was Aer Lingus, with more than 6.5 million units changing hands. The shares rose 1.2 per cent, to close at €2.45.

After the market had closed Ryanair announced it had increased its stake in the former State airline to 29.4 per cent.

In the US, there was a notable surge in demand for short-dated US Treasury bills - regarded as extremely low-risk liquid investments - suggesting that investors still remained nervous.

"All in all, we think the Fed's action on Friday has done little to change the underlying issues in the market," said Camilla Sutton, currency strategist at Scotia Capital.

Julian Jessop, at Capital Economics, said the Fed's move could still backfire. "The acknow-ledgment that the 'downside risks to growth have increased appreciably' is hardly a vote of confidence in economic fundamentals. The fact that the Fed surprised the markets with any sort of rate cut may encourage speculation that some financial institutions must be in even bigger trouble than previously thought, or alternatively, encourage complacency.

"And the fact that the move on the discount rate was largely symbolic might prompt second thoughts about its effectiveness.

"The problems started in the housing market and, two months ago, we were simply looking for signs of contagion; now we have obvious signs of contagion."

By midday in New York, the Dow Jones was down 0.4 per cent, the S&P 500 fell 0.6 per cent and the Nasdaq Composite lost 0.2 per cent.

Gains for European stocks were pared by the close of play. The FTSE Eurofirst 300 index settled 0.6 per cent higher at 1,481.90 but was still down more than 9 per cent from a 6½-year high, hit last month.

In the debt markets, conditions for sellers of commercial paper remained tense yesterday on both sides of the Atlantic.

Investors remained wary of purchasing medium-term commercial paper, due to unease about how the credit turmoil might develop in the coming weeks.

Meanwhile, many deals were still being blackballed by investors, particularly if the issuer was suspected of links to subprime securities.