The Federal Reserve's decision to cut US interest rates by only half a percentage point has been given a lukewarm reaction by stock markets and there are doubts over whether the Fed's action will be sufficient to prevent stock markets resuming their downward direction.

The initial reaction from the New York market was one of disappointment to the Fed's decision, and the markets - which had traded either side of parity for the early part of the day - initially lost ground.

But within minutes, as the market digested the clear hint from the Fed that it will cut rates again in May to boost the US economy, the market changed direction and both the Dow and Nasdaq began climbing.

At the close in New York after an uncertain final session when the key indices oscillated from positive to negative territory, the Dow was down 238.29 on 9,720.82 while the Nasdaq Composite Index was down 93.77 on 1,857.41, a drop of 4.81%.

The stock market has been spiralling downward after a short-lived rally in January. Wall Street plunged last week, driving the Dow below the 10,000 mark for the first time since late October and pushing the Nasdaq well below the 2,000-point level, as investors fret over Japan's troubled banking sector, the soft economy and weak corporate profits. "We think this is consistent with what is needed in the real economy and this is right on track with what we were expecting," said Mr Frank Waung, an economist with S.G. Cowen Securities in New York. Prior to the Fed announcement, analysts had been almost equally divided on the scale of the rate cut - whether it would be half or three-quarters of a percentage point.

Earlier, European stock markets had traded higher, shrugging off a warning from Dutch giant Philips that its mobile phone sales and semiconductor profits were under pressure. The positive mood had emanated from Wall Street, where the Dow industrials rose 1.4 per cent and the Nasdaq tech-laden index 3.2 percent on Monday.

Philips fell a modest 1.8percent on the view that a warning its semiconductor division was being hit by a slowdown in the US economy was already mostly discounted. Telecom equipment firms Marconi and Ericsson also set the pace for a tech-led European stocks rally. Marconi jumped 7.1 percent and Ericsson gained 7.7 percent, helping the DJ Stoxx technology sector index race ahead 5.2 percent amid hopes that an aggressive US interest rate cuts would kick-start the sluggish economy.

The recovery in the TMT sector allowed the FTSE-100 index rebound 1.7 per cent, while London's Techmark index recovered 1.5 per cent. Other European markets were also firmer ahead of the Fed announcement with Frankfurt's technology-based Neuer Markt more than 4 per cent higher.

The markets were also boosted by stronger telecom stocks, where the sector was boosted by reports that the European Union may ask Governments to defer multi-billion euro payments for third generation mobile phone licences or allow mobile operators to share infrastructures because of worries over high debt levels in the telecom sector.