European stocks close higher

LONDON (CNNMoney.com) -- European stocks climbed Friday after the Federal Reserve cut the rate at which it lends funds to banks by half a percentage point to 5.75 percent, soothing credit fears.

The FTSE 100 index rallied 3.5 percent in London to close at 6,064.20. The Paris CAC added 1.9 percent to 5,363.63 and the Frankfurt DAX advanced 1.5 percent to finish the session at 7,378.29.

European stocks gyrated in morning trading but bounced higher early in the afternoon after the Fed cut its so-called discount rate.

Financial stocks, which have been battered recently, gained on the news. Barclays rallied nearly 6 percent and HSBC surged about 5 percent. French bank BNP Paribas also added 5 percent, while Deutsche Bank jumped 3.5 percent.

While the discount rate is largely symbolic, investors were soothed by the Fed's acknowledgment of the recent market turmoil. Banks have been scrambling to secure cash recently, sparking central banks around the world to pump liquidity into their respective systems.

"That's the right support for the market. This is an important message. The central bank is signaling that it is standing by to lend support," Max Holzer of Union Investment told Reuters.

The Fed said it cut the discount rate to improve liquidity. It also said financial market conditions have "deteriorated," and tighter credit conditions and uncertainty could slow future economic growth. (Read the Fed's statement)

Fed policymakers added they are "prepared to act as needed to mitigate the adverse effects on the economy arising from the disruptions in financial markets."

Amid the meltdown in financial markets, investors have raised their bets on the likelihood of the Fed taking emergency action with the Fed funds rate before its next meeting in September.

Some analysts argue the Fed should intervene to calm the storm sweeping global markets. Others say the panic in the market hasn't hurt the economy enough to warrant an emergency rate cut.

At their last meeting on Aug. 7, policymakers kept the Fed funds rate, a key short-term interest rate that affects everything from mortgages to college loans, steady at 5.25 percent.