The US central bank slashed interest rates by a dramatic three quarters of a points on Tuesday in an effort to prevent the US economy falling into recession but it failed to reassure shell shocked investors.
On the Fed news, London's FTSE 100 index of leading shares rallied to stand 1.6 per cent higher but within half an hour, stocks fell back to show a fall of almost half a per cent.
It was a similar story on other European markets, which all moved sharply into positive territory on the Fed action but then fell back as investors waited for the New York opening.
Dealers said that after further heavy losses on Asian bourses Tuesday, taking up from where they left off Monday, European investors sold off sharply in early trade, anticipating a bad day on Wall Street.
A public holiday meant that the US markets were spared the rout which hit Asia and Europe Monday but indications were that New York would come under pressure Tuesday until the Fed dramatically intervened.
"In the end the Fed simply couldn't wait another week until it's next scheduled (rate) meeting," said Capital Economics analyst Paul Ashworth.
"It chose to act, cutting the fed funds rate by an almost unprecedented 75 basis points to 3.5 percent ... in an attempt to shore up confidence before US stock markets open."
The dollar dived immediately following the Fed's action, while oil and gold prices recovered slightly.
Stock market turmoil swept around the world again Tuesday, with Asian shares pummelled by fears of a US recession. World leaders urged calm and dismissed fears of a recession.
"There is no reason to believe there will be a recession in Europe or in Germany," German Chancellor Angela Merkel told NDR-Info radio.
After what one British newspaper called "Manic Monday," European shares rode a roller-coaster as sharp losses at the open gave way to modest rises in London and Paris, amid talk of coordinated interest rate cuts by global central banks, dealers said.
Asian equities slumped earlier, with Japanese share prices hitting a 28-month low and Hong Kong closing down almost nine percent. Traders were nervously waiting for Wall Street to reopen after a long holiday weekend.
At about 1400 GMT the London FTSE 100 index was down 0.43 percent at 5,554.00 points. The Paris CAC 40 showed a loss of 1.21 percent at 4,687.07 points and in Frankfurt the DAX was down 0.56 percent at 6,751.88.
European exchanges on Monday suffered their biggest one-day falls since September 11, 2001 attacks on the United States.
Owing to the Wall Street holiday, dealers initially said they had no fresh lead to halt the global rout set off by disappointment in President George W Bush's economic stimulus package unveiled Friday.
Dealers said Bush's announcement last Friday of 140 billion dollars (97 billion euros) in temporary tax cuts and other measures to ward off a recession in the world's biggest economy was not good enough.
Trading was briefly suspended in South Korea and India on Tuesday.
China's main index shed 7.22 percent, Sydney plunged 7.1 percent, and Indian share prices closed down 4.97 per cent.