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Panic eases in financial markets

The panic infesting financial markets has eased following a pledge that US interest rates will be kept at record lows for the next two years.

The FTSE 100 Index opened nearly 2% higher after it was boosted by overnight rallies which saw the Dow Jones Industrial Average in the US rise by 4%, while Asian markets also made progress.

The turnaround came after the US Federal Reserve said it will keep interest rates at near zero until the middle of 2013 to help the ailing economy.

World markets have been in turmoil for more than a week, falling 15% since July 22 and wiping about 4 trillion US dollars (£2.5 trillion) from their value, as investors feared that the debt crises in the US and the eurozone would lead the global economy back into recession.

Markets have become increasingly fearful about the world's biggest economy after its recovery slowed in recent months and credit ratings agency Standard & Poor's stripped the US of its prized AAA status.

But shares began to recover on Tuesday amid hopes that the Fed would announce a third round of quantitative easing, or money printing.

Although it disappointed markets by failing to announce fresh stimulus measures, it said it had discussed the range of tools at its disposal, which hinted that more money printing could be on the cards.

And the pledge that interest rates will stay "exceptionally low" for at least two years helped restore some confidence to beleaguered markets. It had previously only said interest rates would be low for an "extended" period.

But analysts warned that markets will still show volatility because the underlying cause of the recent bloodbath has not been solved.

Ben Potter, market strategist at IG Markets, said: "The reasons behind the recent turmoil - slowing US growth and European debt contagion - are still present. Our view is that the recent rally was nothing more than a very aggressive short covering rally - if you stretch the rubber band enough one way, it will eventually snap back hard in the opposite direction."

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