Stock markets around the world are rallying in the wake of the Federal Reserve's decision to cut its lending rate to banks to help avert a credit crisis, Bloomberg News said.

"Clearly the Fed stepped up," said Jeffrey Kleintop, who helps oversee more than 173 billion U.S. dollars as chief market strategist at LPL Financial Services in Boston. With the discount rate cut, the Fed "told the markets they're not going to let this liquidity crisis become a major contagion."

The central bank on Aug. 17 cut the interest rate it charges banks by 0.5 percentage point to 5.75 percent, acknowledging for the first time a policy shift was needed to contain the subprime mortgage collapse that roiled financial markets and wiped out 5.56 trillion dollars in global market value in less than a month.

The decision helped ignite a rally in global equities. The Morgan Stanley Capital International World Index of 23 developed markets has since rebounded 5.4 percent, after plummeting 11 percent from its record on July 19.

In the United States, the Standard & Poor's 500 Index climbed 4.8 percent, while the Dow Jones Industrial Average advanced 4.2 percent. The Dow Jones Stoxx 600 Index of European companies rose 5.2 percent. The MSCI Asia-Pacific Index jumped 8.1 percent, the biggest weekly advance since March 2002.

Emerging markets rallied the most after suffering the biggest losses during the global rout. The MSCI Emerging Markets Index climbed 8.7 percent since the discount rate cut, after plummeting 18 percent from a record on July 23.

The advance in stocks accompanied a rise in yields of the safest U.S. government securities as investors waded back into riskier assets.

On that day, bill yields tumbled by the most since 1987.

The main measure of U.S. stock volatility also declined as stock markets regained their footing. The Chicago Board Options Exchange Volatility Index, known as the VIX, fell 31 percent to 20.72 last week. The drop was the biggest since the CBOE started calculating the index in 1990.

Lower readings indicating traders expect smaller share-price swings in the next 30 days.

The Fed's decision bolstered speculation that the central bank will lower its benchmark target lending rate on overnight loans between banks at or before its next meeting on Sept. 18.